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U.S. Securities And Exchange Commission
Washington, D.C. 20549
Form 10-KSB
(Mark One)
_X_ Annual Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (Fee required) For the fiscal year ended December 31, 1999
or
___ Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 (No fee required) For the transition period from ________
to _______
Commission file no. 33-69326
CNB HOLDINGS, INC.
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(Name of small business issuer in its charter)
Virginia 54-1663340
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(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
900 Memorial Drive
Pulaski, Virginia 24301
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(Address of principal executive offices) (Zip Code)
(540) 994-0831
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Issuer's telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $5.00 per share
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Title of Class
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for past 90 days.
Yes __X__ No_____
Check if there is no disclosure of delinquent filers in response to Item
405 of regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $3,912,801.
The aggregate market value of the voting stock as of March 20, 2000, held by
non-affiliates of the registrant computed by reference to the price at which
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the stock was sold, or the average bid and asked prices of such stock, as of
a specified date within the last 60 days was $7,411,192.
926,399 shares of the Issuer's common stock were issued and outstanding as
of March 20, 2000.
Transitional Small Business Disclosure Format. (Check one): Yes___ No _X_
DOCUMENTS INCORPORATED BY REFERENCE
The annual report to security holders for fiscal year ended December 31, 1999
is incorporated by reference into Form 10-KSB Part II, Items 7 and 8, and
Part III, Item 13. The issuer's Proxy Statement dated March 10, 2000 is
incorporated by reference into Form 10-KSB Part III, Items 9, 10, 11 and 12.
PART I
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ITEM 1. DESCRIPTION OF BUSINESS
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GENERAL
CNB Holdings, Inc. (the "Company") was incorporated as a Virginia stock
corporation on April 29, 1993, primarily to own and control all of the
capital stock of Community National Bank (the "Bank"). The Company
presently engages in no business other than owning and managing the Bank.
The Bank is a national banking association which engages in a commercial
banking business from its main office in Pulaski, Virginia. The Bank's
deposits are insured by the Federal Deposit Insurance Corporation (the
"FDIC"), and it is a member of the Federal Reserve System.
In July 1994, the Company completed its initial public offering of 437,225
shares of its common stock, $5.00 par value per share (the "Common Stock"),
at a price of $10.00 per share, pursuant to its Prospectus dated November 16,
1993. The Company received final approval of its application to charter the
Bank from the Office of Comptroller of the Currency (the "OCC") and final
approval of its application for deposit insurance for the bank from the
Federal Deposit Insurance Corporation ("FDIC") on August 29, 1994.
On August 29, 1994, the Bank opened for business.
During 1997, the Board of Directors approved a 25% stock dividend for
shareholders of record as of May 1, 1997. Also during 1997, the Company
filed for and received approval from the SEC for a secondary stock offering
of up to 380,000 shares of its common stock, $5.00 par value per share (the
"Common Stock"), at a price of $9.00 per share, pursuant to its Prospectus
dated December 11, 1997. All 380,000 shares were sold during the first quarter
of 1998. Net proceeds were approximately $3.1 million and were used for general
banking purposes.
LOCATION AND SERVICE AREA
The Bank's primary service area is Pulaski County and includes portions of
Giles, Montgomery, Bland, and Wythe Counties and the City of Radford, Virginia.
The Bank conducts a general commercial banking business in its service area,
emphasizing the banking needs of small-to-medium sized businesses, professional
concerns and individuals. The Bank operates from its main office at 900
Memorial Drive, Pulaski, Virginia, which is at the corner of Memorial Drive and
Lee Highway (U.S. Route 11). See "Item 2. Description of Property" below. The
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Bank draws most of its customer deposits and conducts most of its lending
transactions from within its primary service area. The Bank is the only locally
owned and operated commercial bank in Pulaski County.
Pulaski County is located in the New River Valley area of Southwest Virginia.
Pulaski, the county seat, is approximately 53 miles southwest of Roanoke, 90
miles northeast of the Tri-Cities, Tennessee (Johnson City, Kingsport and
Bristol), and 150 miles north of Charlotte, North Carolina. Pulaski County
had a population of 34,500 in 1994 and a median family income of $28,057 in
1989. Virginia Polytechnic Institute and State University ("Virginia Tech"),
a four-year, comprehensive land grant university with over 22,000 students,
is located approximately 15 miles from Pulaski County.
The principal components of the economy of Pulaski County are manufacturing
(which accounts for the largest share of all economic activity), agriculture,
and tourism. Manufacturing employment is concentrated in the automotive,
furniture and textile industries. The largest industrial employers in the
county include Volvo-GM Heavy Trucks (3,500 employees), Pulaski Furniture
(1,500 employees), Renfro Corporation (a textile manufacturer with 1,000
employees) and Jefferson Mills, Inc. (350 employees). Agricultural production,
consisting primarily of beef cattle and dairy farming contributes over $12
million per year to the county's economy. Claytor Lake State Park, located in
the county, attracts over 800,000 visitors each year, offering swimming,
boating, fishing, hiking and other outdoor sports.
BANKING SERVICES
The Bank offers a full range of deposit services that are typically available
in most banks and savings and loan associations, including checking accounts,
NOW accounts, savings accounts and other time deposits of various types, ranging
from daily money market accounts to longer-term certificates of deposit. The
transaction accounts and time certificates are tailored to the Bank's principal
market area at rates competitive to those offered in the area. In addition,
the Bank offers certain retirement account services, such as Individual
Retirement Accounts (IRAs). All deposits accounts are insured by the FDIC up to
the maximum amount allowed by law (generally, $100,000 per depositor subject to
aggregation rules). The Bank solicits these accounts from individuals,
businesses, associations, organizations, and governmental entities.
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The Bank also offers a full range of short-to-medium term commercial and
personal loans. Commercial loans include both secured and unsecured loans
for working capital (including inventory and receivables), business expansion
(including acquisition of real estate and improvements), and purchase of
equipment and machinery. Consumer loans include secured and unsecured loans
for financing automobiles, home improvements, education and personal
investments. The Bank also makes real estate construction and acquisition
loans and originates and holds fixed and variable rate mortgage loans.
The Bank's lending activities are subject to a variety of lending limits
imposed by federal law. While differing limits apply in certain circumstances
based on the type of loan or the nature of the borrower (including borrowers'
relationship to the Bank), in general the Bank is subject to a loan-to-one
borrower limit of an amount equal to 15% of the Bank's unimpaired capital and
surplus, or 25% of the unimpaired capital and surplus if the excess over 15%
is approved by the board of directors of the Bank and is fully secured by
readily marketable collateral. The Bank may not make loans to any director,
officer, employee or 10% shareholder of the Company or the Bank unless the
loan is approved by the Board of Directors of the Bank and is made on terms
not more favorable than would be available to a person not affiliated with
the Bank.
Other bank services include mortgage loan origination, cash management services,
travelers checks, direct deposit of payroll and social security checks, and
automated drafts for various accounts. The Bank is associated with Most Plus &
VISA shared networks of automated teller machines and debit card retail
locations that Bank customers may use throughout Virginia and other regions.
The Bank also offers VISA credit card services.
The Bank does not plan to exercise trust powers during its initial years of
operation. The Bank may in the future offer a full-service trust department,
but cannot do so without the prior approval of the OCC.
COMPETITION
The banking business is highly competitive. The Bank competes as a financial
intermediary with other commercial banks, savings and loan associations,
credit unions and money market funds operating in Pulaski County and else-
where, most of which are larger and have greater resources than the Bank.
As of March 20, 2000, there were six commercial banks operating a total of
eleven offices in Pulaski County, Virginia. The Bank is the only one of these
institutions that is locally owned and operated. First Virginia Bank is an
in-state bank with three offices in Pulaski County, but is headquartered in
Northern Virginia. Crestar Bank with one office in the county, is a statewide
bank based in Richmond. First Union Bank, a Charlotte, North Carolina based
regional bank operates one branch in the county. Bank of America, with two
offices in Pulaski County, is an affiliate bank of southeast regional bank
holding company also headquartered in Charlotte, North Carolina. First Citizens
Bank, a regional bank with offices in North Carolina and Virginia, headquartered
in Raleigh, operates one branch in Pulaski County. First National Bank of
Christiansburg, a community bank which is headquartered in nearby Montgomery
County, operates a branch in Pulaski County.
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In addition to the commercial banks described above, First American Bank,
a federally chartered savings association, operates two branches in Pulaski
County. Two credit unions also operate in the county. In addition, the
Bank is subject to aggressive competition from a wide variety of financial
service companies offering an expansive array of financial products and
services.
The Company believes that the community focus of the Bank, with its emphasis
on service to small businesses, individuals, and professional concerns, gives
it an advantage in some segments of this market.
EMPLOYEES
The Bank presently has 21 full-time employees and 8 part-time employees for a
total of 25 full-time equivalents. The Company does not have any employees
other than its officers, none of whom receive any remuneration for their
services to the Company.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws and
regulations. These impose specific requirements and restrictions and provide
for general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary
describes statutory or regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any
change in applicable laws or regulations may have a material effect on the
business and prospects of the Company. Beginning with the enactment of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA")
and following with the Federal Deposit Insurance Corporation Improvement Act
("FDICIA"), enacted in 1991, numerous additional regulator requirements have
been placed on the banking industry in the past five years, and additional
changes have been proposed. The operations of the Company and the Bank may
be affected by legislative changes and the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent of
the effect on its business and earnings that fiscal or monetary policies,
economic control, or new federal or state legislation may have in the future.
Federal Bank Holding Company Regulation
The Company is a bank holding company within the meaning of the Bank Holding
Company Act of 1956 (the "BHCA"), Under the BHCA, the Company is subject to
periodic examination by the Board of Governors of the Federal Reserve System
(the "Federal Reserve") and is required to file periodic reports of it
operations and such information as the Federal Reserve may require. Company
and Bank activities are limited to banking, managing or controlling banks,
furnishing services to or performing services for its subsidiaries, or
engaging in any other activity that the Federal Reserve determines to be so
closely related to banking or managing or controlling banks as to be a proper
incident thereto.
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Investments, Control, and Activities. With certain limited exceptions, the
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any
bank, (ii) acquiring direct or indirect ownership or control of any voting
shares of any bank if after such an acquisition it would own or control more
than 5% of the voting shares of such bank (unless it already owns or controls
the majority of such shares), or (iii) merging or consolidating with another
bank holding company.
In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as the Company. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. In the case of the Company, under
Federal Reserve regulations control will be rebuttably presumed to exist if
a person acquires at least 10% of the outstanding shares of any class of
voting securities once the Company's Common Stock is registered under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Company registered
the Common Stock under the Exchange Act by April 30, 1995. The regulations
provide a procedure for challenge of the rebuttable control presumption.
Under the BHCA, the Company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in, nonbanking activities, unless the Federal Reserve,
by order or regulation, has found those activities to be so closely related
to banking or managing or controlling banks as to be a proper incident
thereto. Some of the activities that the Federal Reserve has determined by
regulation to be proper incidents to the business of banking include making
or servicing loans and certain types of leases, engaging in certain
insurance and discount brokerage activities, performing certain data
processing services, acting in certain circumstances as a fiduciary or
investment or financial advisor, owning savings associations, and making
investments in certain corporations or projects designed primarily to
promote community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances in
which the Company might not otherwise do so. Under the BHCA, the Federal
Reserve may require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary
of a bank) upon the Federal Reserve's determination that such activity or
control constitutes a serious risk to the financial soundness or stability
of any subsidiary depository institution of the bank holding company.
Further, federal bank regulatory authorities have additional discretion to
require a bank holding company to divest itself of any bank or nonbank
subsidiary if the agency determines that divestiture may aid the depository
institution's financial condition. The Bank may be required to indemnify, or
cross-guarantee, the FDIC against losses it incurs with respect to any other
bank which the Company controls, which in effect makes the Company's equity
investments in healthy bank subsidiaries available to the FDIC to assist any
failing or failed bank subsidiary of the Company.
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Virginia Bank Holding Company Regulation
All Virginia bank holding companies must register with the Virginia State
Corporation Commission (the "Virginia Commission") under Title 6.1 of the
Code of Virginia (the "Virginia Act"). A registered bank holding company
must provide the Virginia Commission with information with respect to the
financial condition, operations, management, and intercompany relationships
of the holding company and its subsidiaries. The Virginia Commission may
also require such other information as is necessary to keep itself informed
about whether the provisions of Virginia law and the regulations and orders
issued thereunder by the Virginia Commission have been complied with, and
may make examinations of any bank holding company and its subsidiaries.
Under the Virginia Act, it is unlawful without prior approval of the Virginia
Commission for any company to acquire 25% or more of the voting securities of
any bank and for any Virginia bank holding company to acquire direct to
indirect ownership or control of more than 5% of the voting securities of
any bank or other bank holding company. In addition, the Virginia Act
allows regional interstate banking by permitting banking organizations in
certain Southeastern states to acquire Virginia banking organizations if
Virginia banking associations are allowed to acquire banking organizations
in their states and the Virginia banking organization to be acquired has been
in existence and continuously operated as a bank for a period of two years.
As a result of this reciprocal banking provisions, banking organizations in
other states, most significantly North Carolina, have entered the Virginia
market through acquisitions of Virginia institutions. Those acquisitions are
subject to federal and Virginia approval. Recent legislation has broadened
these statutes to permit nationwide reciprocal bank acquisitions. See "The
Bank-Branching" below.
THE BANK
General. The Company is the holding company for the bank, which is a national
banking association. Substantially all company revenues are earned through the
operations of the bank. The Office of Comptroller of the Currency (the "OCC") is
the primary regulator for the Bank. The OCC regulates or monitors all areas of
the Bank's operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securities, payment of dividends, interest rates payable
on deposits, interest rates or fees chargeable on loans, establishment of
branches, corporate reorganizations, maintenance of books and records, and
adequacy of staff training to carry on safe lending and deposit gathering
practices. The Bank must maintain certain capital ratios and is subject to
limitations on aggregate investments in real estate, bank premises, and
furniture and fixtures.
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Under FDICIA, all insured institutions must undergo regular on-site
examinations by their appropriate banking agency. The cost of examinations
of insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports
to the Federal Deposit Insurance Corporation ("FDIC") and the appropriate agency
(and state supervisor when applicable). FDICIA also directs the FDIC to develop
with other appropriate agencies a method for insured depository institutions to
provide supplemental disclosure of the estimated fair market value of assets
and liabilities, to the extent feasible and practicable, in any balance sheet,
financial statement, report of condition or any other report of any insured
depository institution. FDICIA also requires the Federal banking regulatory
agencies to prescribe, by regulation, standards for all insured depository
institutions and depository institution holding companies relating, among other
things, to: (i) internal controls, information systems and audit systems; (ii)
loan documentation; (iii) credit underwriting; (iv) interest rate risk
exposure; and (v) asset quality.
Transactions With Affiliates and Insiders. The Bank is subject to the
provisions on Section 23A of the Federal Reserve Act, which place limits on
the amount of loans or extensions of credit to, or investments in, or certain
other transactions with, affiliates and on the amount of advances to third
parties collateralized by the securities or obligations of affiliates. In
addition, most of these loans and certain other transactions must be secured
in prescribed amounts. The Bank is also subject to the provisions of Section
23B of the Federal Reserve Act that, amoung other things, prohibit an
institution from engaging in certain transactions with certain affiliates
unless the transactions are on terms substantially the same, or at least as
favorable to such institution or its subsidiaries, as those prevailing at
the time for comparable transactions with non-affiliated companies. The Bank
is subject to certain restrictions on extensions of credit to executive
officers, directors, certain principal shareholders and their related
interests. Such extensions of credit (i) must be made on substantially the
same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with third parties and (ii) must
not involve more than the normal risk of repayment or present other
unfavorable features.
Branching. The Bank is permitted to branch freely within the state of
Virginia. The Virginia Act permits statewide branching for Virginia state
banks. As a national bank located in Virginia, these state branch banking
laws also apply to the Bank. On September 29, 1994, the federal Interstate
Banking Efficiency Act (the "Interstate Act), which expands the ability of
banks to compete interstate, was enacted. The Interstate Act permits nation-
wide interstate acquisitions of banks by bank holding companies beginning
September 29, 1995, and permits nationwide interstate mergers of banks
beginning June 1, 1997. States can legislatively opt not to permit inter-
state banks mergers or can legislatively opt to permit interstate bank
merges before the June 1, 1997, effective date. The Virginia General
Assembly has adopted legislation which opts to permit nationwide inter-
state bank mergers effective July 1, 1995.
Community Reinvestment Act. The Community Reinvestment Act (the "CRA")
requires that, in connection with examinations of financial institutions
within their respective jurisdictions, the federal regulators of financial
institutions to evaluate the record of the financial institutions in meeting
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the credit needs of their local communities, including low and moderate
income neighborhoods, consistent with the safe and sound operation of those
institutions. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility. The Bank has
not yet received a CRA evaluation.
Other Regulations. Interest and certain other charges collected or contracted
by the Bank are subject to state usury laws and certain federal laws concerning
interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowed, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials
to determine whether a financial institution is fulfilling its obligation to
help meet the housing needs of the community it serves, the Equal Credit
Opportunity Act prohibiting discrimination on the basis of race, creed, or
other prohibited factors in extending credit, the Fair Credit Reporting Act
of 1978 governing the use and provision of information to credit reporting
agencies, the Fair Debt Collection Act governing the manner in which consumer
debts may be collected by collection agencies, and the rules and regulations
of the various federal agencies charged with the responsibility of
implementing such federal laws. The deposit operations of the Bank also are
subject to Truth-In-Savings Act, which requires detailed disclosure of the
yield and terms of deposit products, the Right to Financial Privacy Act,
which imposes a duty to maintain confidentiality of consumer financial
records and prescribes procedures for complying with administrative subpoena
of financial records, and the Electronic Funds Transfer Act and Regulation
E issued by the Federal Reserve Board to implement that act, which governs
automatic deposits to and withdrawals from deposit accounts and customers'
rights and liabilities arising from the use of automated teller machines and
other electronic banking services.
Deposit Insurance
The deposits of the Bank are currently insured to a maximum of $100,000 per
depositor, subject to certain aggregation rules. The FDIC establishes rates
for the payment of premiums by federally insured banks and thrifts for
deposit insurance. Separate insurance funds (BIF and SAIF) are maintained
for commercial banks and thrifts, with insurance premiums from the industry
used to offset losses from insurance payouts when banks and thrifts fail.
Due to the lower rate of failures in recent years, the fees Banks and thrifts
pay BIF and SAIF have decreased. The FDIC has adopted a risk-based deposit
insurance premium system for all insured depository institutions, including the
Bank, which requires that a depository institution pay to BIF or SAIF from $.00
to $.27 per $100 of insured deposits depending on its capital levels and risk
profile, as determined by its primary federal regulator on a semiannual basis.
The current assessment rate per $100 of insured deposits of the Bank is $.00, or
a minimum of $2,000 annually.
Dividends
The principal source of the Company's cash revenues comes from dividends
received from the Bank. The amount of dividends that may be paid by the
Bank to the Company depends on the Bank's earnings and capital position
and is limited by federal law, regulations and policies. As a national
bank, the Bank may not pay dividends from its paid-in-capital. All
dividends must be paid out of undivided profits then on hand, after de-
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ducting expenses, including reserves from losses and bad debts. In
addition, a national bank is prohibited from declaring a dividend on its
shares of common stock until its surplus equals its stated capital,
unless there has been transferred to surplus no less than one-tenth of
the bank's net profits of the preceding two consecutive half-year periods
(in the case of an annual dividend). The approval of the OCC is required
if the total of all dividends declared by a national bank in any
calendar year exceeds the total if its net profits for that year combined
with its retained net profits for the preceding two years, less any
required transfers to surplus. Under FDICIA, the Bank may not pay a
dividend if, after paying the dividend, the Bank would be undercapitalized.
See "Capital Regulations" below.
Capital Regulations
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk
profile among banks and bank holding companies, account for off-balance
sheet exposure, and minimize disincentives for holding liquid assets. The
resulting capital ratios represent qualifying capital as a percentage of
total risk-weighted assets and off-balance sheet items. The guidelines are
minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios well
in excess of the minimums. The current guidelines require all federally
regulated banks and bank holding companies to maintain a minimum risk-based
total capital ratio equal to 8%, of which at least 4% must be Tier 1 capital.
Tier 1 capital includes common shareholders' equity, qualifying perpetual
preferred stock, and minority interests in equity accounts of consolidated
subsidiaries, but excludes goodwill and most other intangibles and excludes
the allowance for loan and lease losses. Tier 2 capital includes the excess
of any preferred stock not included in Tier 1 capital, mandatory convertible
securities, hybrid capital instruments, subordinated debt and intermediate
term-preferred stock, and general reserves for loan and lease losses up to
1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are
assigned to the 100% risk category, except for first mortgage loans fully
secured by residential property and, under certain circumstances, residential
construction loans, both of which carry a 50% rating. Most investment
securities are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% rating, and direct obligations of or
obligations guaranteed by the United States Treasury of United States
Government agencies, which have a 0% rating.
The federal bank regulator authorities have also implemented a leverage ratio,
which is Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank or bank holding company may leverage its
equity capital base. The minimum required leverage ratio for top-rated
institutions is 3%, but most institutions are required to maintain an
additional cushion of at least 100 to 200 basis points.
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These guidelines apply on a consolidated basis to bank holding companies with
total consolidated assets of $150 million or more. For bank holding companies
with less than $150 million in total consolidated assets (such as the
Company), the guidelines will be applied on a bank only basis unless the
bank holding company is engaged in a nonbanking activity involving
significant leverage or has a significant amount of debt outstanding that
is held by the general public.
FDICIA established a new capital-based regulatory scheme designed to promote
early intervention for troubled banks and requires the FDIC to choose the
least expensive resolution of bank failures. The new capital based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as "well capitalized" institution, a bank
must have a leverage ratio of no less the 5%, a Tier 1 risk-based ratio of
no less than 6%, and a total risk-based capital ratio of no less than 10%,
and the bank must not be under any order or directive from the appropriate
regulatory agency to meet and maintain a specific capital level. As of
December 31, 1996, the Bank qualified as "well-capitalized." See "Item 6.
Management's Discussion and Analysis or Plan of Operation."
Under the FDICIA regulations, the applicable agency can treat an institution
as if it were in the next lower category of the agency determines (after
notice and an opportunity for hearing) that the institution is in an unsafe
or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution will increase, and
the permissible activities of the institution will decrease, as it moves
downward through the capital categories. Institutions that fall into one of
the other three undercapitalized categories may be required to (i)submit a
capital restoration plan; (ii) raise additional capital; (iii) restrict their
growth, deposit interest rates, and other activities;(iv) improve their
management; (v) eliminate management fees; or (vi) divest themselves of all
or part of their operations. Bank holding companies controlling financial
institutions can be called upon to boost the institutions' capital and to
partially guarantee the institutions' performance under their capital
restoration plans.
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These capital guidelines can affect the Company in several ways. Rapid
growth, poor loan portfolio performance, or poor earnings performance, or a
combination of these factors, could change the Company's capital position in
a relatively short period of time, making additional capital infusion
necessary.
FDICIA requires the federal banking regulators to revise the risk-based
capital standards to provide for explicit consideration of interest-rate
risk, concentration of credit risk, and the risks of non-traditional
activities. It is uncertain what affect these regulations, when
implemented, would have on the Company and the Bank.
Recent Legislative Developments
From time to time, various bills are introduced in the United States Congress
with respect to the regulation of financial institutions. Certain of these
proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. The Company cannot predict whether any
of these proposals will be adopted or, if adopted, how these proposals would
affect the Company.
YEAR 2000 READINESS
A detailed discussion of the Company's and Bank's year 2000 readiness and
compliance program in included in "Management's Discussion and Analysis", on
page 29 and is hereby incorporated by reference.
ITEM 2. DESCRIPTION OF PROPERTY.
Company and Bank main offices are located on a 4.9 acre plot at 900 Memorial
Drive in Pulaski. The Bank opened for business on August 29, 1994, in a
temporary modular building on the site and utilized the temporary facility
for 16 months while the permanent Bank facility was constructed. The Bank
began construction on the permanent facility on March 28, 1995. Construction
was completed on December 1, 1995. The cost of the building was $933,000.
The furniture, fixtures and equipment for the facility cost $143,000. The
permanent facility is a two-story brick building and contains approximately
10,500 square feet. It features five inside teller windows, three drive-up
lanes, a drive-up night depository and a drive up automated teller machine.
The main office site was purchased from a partnership 100% owned by Jack W.
Bowling, a director of the Company, and five members of his immediate family
in an exchange transaction for 25,000 shares of common stock. See "Item 12.
Certain Relationships and Related Transactions."
The second branch office of the Bank, which opened October 4, 1997, is located
at 202 N. Washington Ave, Pulaski, Virginia in CNB Center at the site of a
regional bank's former branch office. It is a full-service branch, with three
inside teller windows, a drive-up lane, a night depository, an automated teller
machine, and safety deposit boxes. The Bank also recently installed a stand-
alone automated teller machine on the campus of the New River Community College
in Dublin, Virginia.
CNB Center was purchased in 1997 from NationsBank for $187,000. This three
story building has approximately 20,000 square feet. In addition to the branch,
the building houses the Bank's operations department. The second and third
floors are leased to unrelated third parties and is available for future
expansion.
<PAGE>
In the normal course of business, the Bank invests in debt securities
collateralized by real estate mortgages on residential properties. The Bank's
policies regarding investment in mortgage-backed securities are subject to
change by the Board of Directors with out a vote of stockholders. The Bank
also originates and holds real estate mortgages. These are secured by first
and second deeds of trust on residential and commercial properties.
ITEM 3. LEGAL PRCEEDINGS.
Neither the Company nor the Bank is a party to, nor is any of their property
the subject of, any material pending legal proceedings incidental to the
business of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
-------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's articles of incorporation authorize it to issue up to 10,000,000
shares of common stock, par value $5.00 per share (the "Common Stock"), of
which 926,399 were issued and outstanding as of March 20, 2000. There is no
established public trading market in the common stock, and one is not expected
to develop in the near future. The Company's common stock trades thinly,
primarily on the local market. However, three stock brokerage firms, Davenport
& Company, Scott & Stringfellow and Wheat First Securities, have been approved
by the Company as market makers. As of March 20, 2000, there are approximately
654 stockholders of record.
The Company has never paid a dividend. It is anticipated that earnings will
be retained for several years to expand the Bank's capital base to support
deposit growth and that no dividends will be paid on the Company's stock for
the next five years. Dividends might not be paid for several years thereafter
even though the Company has achieved profitable operations.
Moreover, the National Banking Act limits dividend payments by national banks,
such as the Bank, which in turn could limit the Company's ability to pay
dividends. The Bank may only pay dividends out of its net profits then on
hand, after deducting expenses, including losses and bad debts. In addition,
the Bank is prohibited from declaring a dividend on its shares of common
stock until its surplus equals its stated capital, unless there has been
transferred to this surplus no less than one-tenth of the Bank's net profits
of the preceding two consecutive half-year periods (in the case of an annual
dividend). The approval of the OCC will be required if the total of all
dividends declared in any calendar year by the Bank exceeds the Banks' net
profits to date, as defined, for that year combined with its retained net
profits for the preceding two years less any required transfers to surplus.
At December 31, 1999, the Bank was not yet cumulatively. The OCC also
has the authority under federal law to enjoin a national bank engaging in
what in its opinion constitutes an unsafe or unsound practice in conducing
its business, including the payment of a dividend under certain circumstances.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management's Discussion and Analysis is herein incorporated by reference to
the Company's 1999 Annual Report to Stockholders, pages 24 through 39.
ITEM 7. FINANCIAL STATEMENTS.
The following consolidated financial statements of the registrant and the
Independent Auditors' Report set forth on pages 3 through 23 of the Company's
1999 Annual Reports to Stockholders are incorporated herein by reference:
1. Independent Auditor's Report
2. Consolidated Balance Sheets as of December 31, 1999 and 1998
3. Consolidated Statements of Operations for the years
ended December 31, 1999, 1998, and 1997
4. Consolidated Statements of Stockholders' Equity for the years
and period ended December 31, 1999, 1998, and 1997
5. Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998, and 1997
6. Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There were no changes in accountants during the year and there were no
disagreements on accounting and financial disclosure.
PART III
----------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16 (a) OF EXCHANGE ACT.
Executive Officers of the Company as of December 31, 1999 are listed on page
5 of the Company's Proxy statement dated March 10, 2000 and is incorporated
herein by reference. Information with respect to the directors of the
Company is set out under the caption "Election of Directors" on page 2 of
The Company's Proxy statement dated March 10, 2000 which information is
incorporated herein by reference.
The disclosure required by item 405 of regulation S-K is set out under the
caption "Compliance with Section 16 of the Securities Exchange Act" on
page 7 of the Company's Proxy Statement dated March 10, 2000, which
information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information set forth under "Executive and Board Compensation" on pages
5 through 6 of the Company's Proxy Statement dated March 10, 2000, is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under "Voting" on page 1, "Security Ownership of
Certain Beneficial Owners and Management" on pages 2 and 3 and under
"Election of Directors" on pages 3 and 4 of the Company's Proxy Statement
dated March 10, 2000, is incorporated herein by reference.
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information contained under "Certain Relationships and Related Trans-
actions" on page 4 of the Company's Proxy statement dated March 10, 2000,
is incorporated herein by reference.
PART IV
-------
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The following documents are filed as part of the report:
1. Financial Statements:
The following financial statements are incorporated in this report by
reference to the indicated pages of the 1998 Annual Report to Stockholder
1999 Annual Report to
Stockholders page number
------------------------
Independent Auditor's Report 2
Consolidated Balance Sheets-December 31, 1999 and 1998 3
Consolidated Statements of Operations - Years ended
December 31, 1999, 1998 and 1997 4
Consolidated Statements of Stockholders' Equity - Years
ended December 31, 1999, 1998 and 1997 5
Consolidated Statements of Cash Flows - Years ended
December 31, 1999, 1998 and 1997 6
Notes to Consolidated Financial Statements 7-23
Management's Discussion and Analysis 24-39
2. Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the
information is presented in the Consolidated Financial Statements or related
notes.
3. Exhibits:
The exhibits filed as part of this report and exhibits incorporated herein by
reference to other documents are listed in the Index to Exhibits to this
Annual Report on Form 10-K.
3.1 Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement
No. 33-69326 on Form S-1).
3.2 By-laws (incorporated by reference to Exhibit 3.2 to the Company's
Registration Statement No. 33-69326 on Form S-1).
4.1 Provisions in the Company's Articles of Incorporation and By-laws
defining the rights of holders of the Company's Common Stock
<PAGE>
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement No. 33-69326 on Form S-1).
10.1 Employment Agreement dated June 21, 1993, by and between Wayne L.
Carpenter and the Company incorporated by reference to Exhibit 3.2
to the Company's Registration Statement No. 33-69326 on Form S-1).
10.2 Construction Agreement dated February 2, 1995, by and between the
Bank and Turn-Key Financial Builders, Inc. (incorporated by reference
to Exhibit 10.2 to the Company's 1995 Form 10-KSB).
10.3 Security Equipment Purchase Agreement dated February 15, 1995, by
and between the Bank and Security Corporation (incorporated by
reference to Exhibit 10.3 to the Company's 1995 Form 10-KSB).
10.4 CNB Holdings, Inc. 1995 Stock Option Plan (incorporated by reference
to Exhibit 10.4 to the Company's 1995 Form 10-KSB).
12.1 1999 Report to Stockholders.
21.1 Subsidiaries of the Company (incorporated by reference to Exhibit
10.4 to the Company's 1995 Form 10-KSB).
22.1 2000 Proxy Statement.
<PAGE>
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
CNB HOLDINGS, INC.
Date: March 24, 2000 By: s/Hiawatha Nicely, Jr.
-------------------------------
Hiawatha Nicely, Jr.
Chief Executive Officer
In accordance with the Exchange Act, this report has to be signed below by
the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
Signature Title Date
--------- ----- ----
<TABLE>
<CAPTION>
<S><C>
s/Sybil S. Atkinson
_________________________ Director March 24, 2000
Sybil S. Atkinson
s/Jack W. Bowling
_________________________ Director March 24, 2000
Jack W. Bowling
s/Jackson M. Bruce
_________________________ Director March 24, 2000
Jackson M. Bruce
s/Randolph V. Chrisley
_________________________ Director March 24, 2000
Randolph V. Chrisley
Chairman,
President and
s/Hiawatha Nicely, Jr. Chief Executive
_________________________ Officer March 24, 2000
Hiawatha Nicely, Jr.
s/A. Carole Pratt
_________________________ Director March 24, 2000
A. Carole Pratt
s/David W. Ratcliff, Jr.
_________________________ Director March 24, 2000
David W. Ratcliff, Jr.
s/Nathanial R. Tuck
_________________________ Director March 24, 2000
Nathaniel R. Tuck
s/J. David Wine
_________________________ Director March 24, 2000
J. David Wine
</TABLE>
<PAGE>
INDEX TO EXHIBITS
-----------------
PAGE NO. IN
EXHIBIT NO. DESCRIPTION EQUENTIAL SYSTEM
- ----------- ----------- ----------------
3.1 Amended and Restated Articles of
Incorporation (incorporated by reference
to Exhibit 3.1 to the Company's Registration
Statement No. 33-69326 on Form S-1).
3.2 By-laws (incorporated by reference to Exhibit
3.2 to the Company's Registration Statement No.
33-69326 on Form S-1).
4.1 Provisions in the Company's Articles of
Incorporation and By-laws defining the rights
of holders of the Company's Common Stock
(incorporated by reference to Exhibit 4.1 to
the Company's Registration Statement No.
33-69326 on Form S-1).
10.1 Employment Agreement dated June 21, 1993, by
and between Wayne L. Carpenter and the Company
incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement No.
33-69326 on Form S-1).
10.2 Construction Agreement dated February 2, 1995,
by and between the Bank and Turn-Key Financial
Builders, Inc. (incorporated by reference to
Exhibit 10.2 to the Company's 1995 Form 10-KSB).
10.3 Security Equipment Purchase Agreement dated
February 15, 1995, by and between the Bank and
Security Corporation (incorporated by reference
to Exhibit 10.3 to the Company's 1995 Form 10-KSB).
10.4 CNB Holdings, Inc. 1995 Stock Option Plan
(incorporated by reference to Exhibit 10.4 to the
Company's 1995 Form 10-KSB).
12.1 1999 Report to Stockholders.
21.1 Subsidiaries of the Company (incorporated by
reference to Exhibit 10.4 to the Company's 1995
Form 10-KSB).
22.1 2000 Proxy Statement.
<PAGE>
================================================================================
1999 Annual Report
- --------------------------------------------------------------------------------
Table of Contents
<TABLE>
<S> <C>
Letter to Stockholders................................................. 1
Independent Auditor's Report........................................... 2
Consolidated Balance Sheets............................................ 3
Consolidated Statements of Operations.................................. 4
Consolidated Statements of Stockholders' Equity........................ 5
Consolidated Statements of Cash Flows.................................. 6
Notes to Consolidated Financial Statements............................. 7
Management's Discussion and Analysis................................... 24
Board of Directors and Officers........................................ 40
Stockholder Information................................................ 41
</TABLE>
<PAGE>
[CNB HOLDINGS, INC. LOGO]
February 28, 2000
CNB Holdings, Inc.
Shareholders
Dear Shareholder:
You are cordially invited to attend the annual shareholders meeting of CNB
Holdings, Inc., to be held Thursday, April 13, 2000 at 10:00 a.m., local time at
Community National Bank's training facilities, 900 Memorial Drive, Pulaski,
Virginia. You will be asked to consider and vote on the nominees for election as
directors to serve until 2003. Additionally we will review the results of 1999
and the future growth plans for CNB Holdings, Inc., and Community National Bank
along with other business as may properly come before the meeting.
Community National Bank and CNB Holdings, Inc., successfully navigated the
issues of Y2K bringing the bank and its clients into the new millennium prepared
to increase owner equity and profitability.
Community National Bank, its management and board of directors are committed
to achieving the highest level of growth while maintaining profitability. The
company is positioned to move forward effectively in both of these areas.
The board of directors join me in thanking you for your continued support over
the years and we look forward to continued growth in the value of our
investment.
Hiawatha Nicely, Jr.
/s/ Hiawatha Nicely, Jr.
Chairman, President, and CEO
CNB
<TABLE>
<S> <C>
900 Memorial Drive o Post Office Box 1060 o Pulaski, Virginia 24301 o (540) 994-0831
202 N. Washington Avenue o Pulaski, Virginia 24301
</TABLE>
<PAGE>
Independent Auditor's Report
Board of Directors and Stockholders
CNB Holdings, Inc.
Pulaski, Virginia
We have audited the consolidated balance sheets of CNB Holdings, Inc. and
subsidiary (Community National Bank) as of December 31, 1999 and 1998 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of CNB Holdings, Inc.
and subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
Pulaski, Virginia
January 7, 2000
2
<PAGE>
================================================================================
Consolidated Balance Sheets
December 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and due from banks $ 2,896,627 $ 2,925,106
Federal funds sold 760,000 495,000
Investment securities available for sale 14,188,398 16,427,685
Loans, net of allowance for loan losses
of $321,574 in 1999 and $372,574 in 1998 31,570,674 31,108,102
Property and equipment, net 1,994,281 1,952,346
Accrued income 307,451 425,640
Other assets 60,900 94,836
----------- -----------
Total assets $51,778,331 $53,428,715
=========== ===========
Liabilities
Demand deposits $ 6,300,356 $ 7,107,894
Interest-bearing demand deposits 13,130,924 10,723,459
Savings deposits 6,805,463 6,629,166
Large denomination time deposits 4,041,584 4,456,768
Other time deposits 15,491,406 17,200,180
----------- -----------
Total deposits 45,769,733 46,117,467
Federal funds purchased - 851,000
Other borrowed funds 126,570 132,590
Accrued interest payable 61,095 72,786
Other liabilities 27,954 15,140
----------- -----------
Total liabilities 45,985,352 47,188,983
----------- -----------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value; 1,000,000 shares
authorized; none outstanding - -
Common stock, $5 par value; 10,000,000 shares
authorized; 926,399 shares outstanding
in 1999 and 1998 4,631,995 4,631,995
Surplus 2,803,782 2,803,782
Retained deficit (1,156,366) (1,185,804)
Unrealized depreciation on investment
securities available for sale (486,432) (10,241)
----------- -----------
Total stockholders' equity 5,792,979 6,239,732
----------- -----------
Total liabilities and stockholders' equity $51,778,331 $53,428,715
=========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
================================================================================
Consolidated Statements of Operations
Years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
----------- ---------- -----------
<S> <C> <C> <C>
Interest income:
Loans and fees on loans $2,759,294 $2,322,271 $1,668,116
Federal funds sold 57,161 218,361 40,131
Taxable investment securities 831,176 800,268 745,596
---------- ---------- ----------
Total interest income 3,647,631 3,340,900 2,453,843
---------- ---------- ----------
Interest expense:
Deposits 1,812,721 1,809,944 1,353,521
Federal funds purchased 11,059 120 17,166
Other borrowed funds 7,363 3,467 -
---------- ---------- ----------
Total interest expense 1,831,143 1,813,531 1,370,687
---------- ---------- ----------
Net interest income 1,816,488 1,527,369 1,083,156
Provision for loan losses 173,292 165,551 185,943
---------- ---------- ----------
Net interest income after provision
for loan losses 1,643,196 1,361,818 897,213
---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts 172,063 169,108 112,405
Net realized gains (losses) on sales of securities (950) - 2,662
Other income 94,057 105,649 37,532
---------- ---------- ----------
Total noninterest income 265,170 274,757 152,599
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 793,405 748,068 584,633
Occupancy expense 139,366 120,536 79,983
Equipment expense 113,165 123,607 92,028
Other expense 832,992 620,195 540,418
---------- ---------- ----------
Total noninterest expense 1,878,928 1,612,406 1,297,062
---------- ---------- ----------
Net income (loss) $ 29,438 $ 24,169 $ (247,250)
========== ========== ==========
Basic earnings per share $ .03 $ .03 $ (.45)
========== ========== ==========
Diluted earnings per share $ .03 $ .03 $ (.45)
========== ========== ==========
Weighted average shares outstanding 926,399 892,786 546,453
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE>
================================================================================
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Retained Other
Common Stock Earnings Comprehensive
-------------------------
Shares Amount Surplus (Deficit) Income (Loss) Total
------------ ---------- ---------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1996 437,225 $2,186,125 $2,156,782 $ (962,723) $ (56,663) $3,323,521
Comprehensive income
Net loss - - - (247,250) - (247,250)
Net change in unrealized
depreciation on investment
securities available for sale - - - - 38,174 38,174
Reclassification adjustment (2,662) (2,662)
----------
Total comprehensive income (211,738)
Stock dividend 109,306 546,530 (546,530) - - -
Redemption of fractional
shares (132) (660) (504) - - (1,164)
------------ ---------- ---------- ------------- ------------ ----------
December 31, 1997 546,399 2,731,995 1,609,748 (1,209,973) (21,151) 3,110,619
Comprehensive income
Net income - - - 24,169 - 24,169
Net change in unrealized
depreciation on investment
securities available for sale - - - - 10,910 10,910
----------
Total comprehensive income 35,079
Proceeds from sale of
common stock 380,000 1,900,000 1,520,000 - - 3,420,000
Costs related to sale of
common stock - - (325,966) - - (325,966)
------------ ---------- ---------- ------------- ------------ ----------
December 31, 1998 926,399 4,631,995 2,803,782 (1,185,804) (10,241) 6,239,732
Comprehensive income
Net income - - - 29,438 - 29,438
Net change in unrealized
depreciation on investment
securities available for sale - - - - (476,191) (476,191)
----------
Total comprehensive income (446,753)
------------ ---------- ---------- ------------- ------------ ----------
December 31, 1999 926,399 $4,631,995 $2,803,782 $ (1,156,366) $ (486,432) $5,792,979
============ ========== ========== ============= ============ ==========
</TABLE>
See Notes to Consolidated Financial Statements
================================================================================
Consolidated Statements of Cash Flows
5
<PAGE>
Years ended December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ------------- --------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss $ 29,438 $ 24,169 $ (247,250)
Adjustments to reconcile net income (loss)
to net cash used by operations:
Loss on disposal of equipment - 9,966 -
Depreciation and amortization 144,458 141,789 105,660
Provision for loan losses 173,292 165,551 185,943
Net realized (gains) losses on securities 950 - (2,662)
Accretion of discount on securities, net 29,146 20,964 (44,809)
Changes in assets and liabilities:
Accrued income 118,189 (184,322) 20,230
Other assets 15,218 51,904 (19,739)
Accrued interest payable (11,691) 17,338 18,836
Other liabilities 12,814 (7,971) 6,623
------------ ----------- -------------
Net cash flows from operating activities 511,814 239,388 22,832
------------ ----------- -------------
Cash flows from investing activities:
Net (increase) decrease in federal funds sold (265,000) 526,000 (619,000)
Purchases of investment securities (18,224,787) (29,693,672) (16,010,481)
Sales of available for sale securities 4,495,138 - 4,276,997
Maturities of investment securities 15,462,649 24,992,670 11,392,494
Net increase in loans (635,864) (8,878,426) (9,916,792)
Purchases of property and equipment (167,675) (220,365) (528,763)
------------ ----------- -------------
Net cash provided by (used in) investing activities 664,461 (13,273,793) (11,405,545)
------------ ----------- -------------
Cash flows from financing activities:
Net increase in demand, NOW, and savings deposits 1,776,224 5,916,535 5,309,304
Net increase (decrease) in time deposits (2,123,958) 3,607,044 7,243,882
Net increase in federal funds purchased (851,000) 851,000 -
Proceeds from borrowed funds - 135,000 -
Repayment of borrowed funds (6,020) (2,410) -
Issuance of common stock - 3,420,000 -
Stock issuance costs - (258,498) (67,468)
Redemption of fractional shares - - (1,164)
------------ ------------ ------------
Net cash provided by (used in) financing activities (1,204,754) 13,668,671 12,484,554
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (28,479) 634,266 1,101,841
Cash and cash equivalents, beginning 2,925,106 2,290,840 1,188,999
------------ ------------ ------------
Cash and cash equivalents, ending $ 2,896,627 $ 2,925,106 $ 2,290,840
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 1,842,834 $ 1,796,193 $ 1,351,851
============ ============ ============
Income taxes paid $ - $ - $ -
============ ============ ============
Supplemental disclosure of noncash investing activities:
Other real estate acquired in settlement of loans $ - $ - $ 58,487
============ ============ ============
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies
Organization
CNB Holdings, Inc. (the Company) is a bank holding company incorporated under
the laws of Virginia on April 29, 1993. On August 29, 1994, the Company's
wholly owned subsidiary, Community National Bank (the Bank), was chartered under
the laws of the United States and the Bank opened for business in Pulaski,
Virginia. As an FDIC insured National Banking Association, the Bank operates
two banking offices and is subject to regulation by the Comptroller of the
Currency. The Company is regulated by the Federal Reserve.
The accounting and reporting policies of the Company and the Bank follow
generally accepted accounting principles and general practices within the
financial services industry. Following is a summary of the more significant
policies.
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
the Bank. All significant intercompany transactions and balances have been
eliminated in consolidation.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change
relate to the determination of the allowance for loan losses. In connection
with the determination of the allowance for loan losses, management obtains
independent appraisals for significant properties.
Substantially all of the Bank's loan portfolio consists of loans in the New
River Valley area of Southwest Virginia. Accordingly, the ultimate
collectibility of a substantial portion of the Bank's loan portfolio and the
recovery of a substantial portion of the carrying amount of foreclosed real
estate are susceptible to changes in local market conditions. The regional
economy is diverse, but influenced to an extent by the manufacturing segment.
While management uses available information to recognize loan and foreclosed
real estate losses, future additions to the allowances may be necessary based on
changes in local economic conditions. In addition, regulatory agencies, as a
part of their routine examination process, periodically review the Bank's
allowances for loan and foreclosed real estate losses. Such agencies may require
the Bank to recognize additions to the allowances based on their judgments about
information available to them at the time of their examinations. Because of
these factors, it is reasonably possible that the allowances for loan and
foreclosed real estate losses may change materially in the near term.
Cash and cash equivalents
For purposes presenting in the consolidated statement of cash flows, cash and
cash equivalents are defined as those amounts included in the balance sheet
caption "cash and due from banks".
Trading securities
The Bank does not hold securities for short-term resale and therefore does not
maintain a trading securities portfolio.
7
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Securities held to maturity
Bonds, notes and debentures for which the Bank has the positive intent and
ability to hold to maturity are reported at cost, adjusted for premiums and
discounts that are recognized in interest income using the interest method over
the period to maturity or to call dates. Currently the Bank has no securities
held to maturity.
Securities available for sale
Available-for-sale securities are reported at fair value and consist of bonds,
notes, debentures, and certain equity securities not classified as trading
securities or as held-to-maturity securities.
Unrealized holding gains and losses on available-for-sale securities are
reported as a net amount in a separate component of stockholders' equity.
Realized gains and losses on the sale of available-for-sale securities are
determined using the specific-identification method. Premiums and discounts are
recognized in interest income using the interest method over the period to
maturity or to call dates.
Declines in the fair value of individual held-to-maturity and available-for-sale
securities below cost that are other than temporary are reflected as write-downs
of the individual securities to fair value. Related write-downs are included in
earnings as realized losses.
Loans receivable and allowance for loan losses
Loans are reported at their outstanding balance principal reduced by an
allowance for loan losses and adjusted for net unamortized origination fees and
costs.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan. Discounts and
premiums on any purchased residential real estate loans are amortized to income
using the interest method over the remaining period to contractual maturity,
adjusted for anticipated prepayments. Discounts and premiums on any purchased
consumer loans are recognized over the expected lives of the loans using methods
that approximate the interest method.
Interest is accrued and credited to income based on the principal amount
outstanding. The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they become
due. When interest accrual is discontinued, all unpaid accrued interest is
reversed. Interest income is subsequently recognized only to the extent cash
payments are received.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs, net of recoveries. Management's periodic evaluation of the adequacy
of the allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, the estimated value of any underlying collateral,
and current economic conditions.
Property and equipment
Land is carried at cost. Bank premises, furniture and equipment are carried at
cost, less accumulated depreciation computed by the straight-line method over
the following estimated useful lives:
Years
-----
Buildings and land improvements 20 to 40
Furniture and equipment 5 to 10
8
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Foreclosed properties
Real estate properties acquired through or in lieu of, loan foreclosure are to
be sold and are initially recorded at fair value less anticipated cost to sell
at the date of foreclosure establishing a new cost basis. After foreclosure,
valuations are periodically performed by management and the real estate is
carried at the lower of carrying amount or fair value less cost to sell. Revenue
and expenses from operations and changes in the valuation allowance are included
in loss on foreclosed real estate. The historical average holding period for
such properties is less than 12 months.
Stock-based compensation
The Company accounts for its stock-based compensation plans using the accounting
prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees. The Company is not required to adopt the fair value based
recognition provisions prescribed under SFAS No. 123, Accounting for Stock-Based
Compensation (issued in October 1995), but complies with the disclosure
requirements set forth in the Statement, which include disclosing pro forma net
income as if the fair value based method of accounting has been applied.
Income taxes
Provision for income tax is based on amounts reported in the statements of
operations (after exclusion for non-taxable income and non-deductible expenses)
and consists of taxes currently due plus deferred taxes on temporary differences
in the recognition of income and expense for tax and financial statement
purposes. Deferred tax assets and liabilities are included in the financial
statements at currently enacted income tax rates applicable to the period in
which the deferred tax assets and liabilities are expected to be realized or
settled. As changes in tax laws or rates are enacted, deferred tax assets and
liabilities are adjusted through the provision for income taxes. Deferred tax
assets, net of a valuation allowance if deemed appropriate, are recognized for
operating losses that are available to offset future taxable income.
Earnings per share
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average number of common shares outstanding during
the period, after giving retroactive effect to stock splits and dividends.
The computation of diluted earnings per share is similar to the computation of
basic earnings per share except that the denominator is increased to include the
number of additional common shares that would have been outstanding if potential
dilutive common shares had been issued. The numerator is adjusted for any
changes in income or loss that would result from the assumed conversion of those
potential common shares.
Business segments
The Company reports its activities as a single business segment. In determining
the appropriateness of segment definition, the Company considers components of
the business about which financial information is available and regularly
evaluated relative to resource allocation and performance assessment.
Comprehensive income
Annual comprehensive income reflects the change in the Company's equity during
the year arising from transactions and events other than investments by and
distributions to stockholders. It consists of net income plus certain other
changes in assets and liabilities that are reported as separate components of
stockholders' equity rather than as income or expense.
9
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Financial instruments
Any derivative financial instruments held or issued by the Bank are held or
issued for purposes other than trading.
In the ordinary course of business the Bank has entered into off-balance-sheet
financial instruments consisting of commitments to extend credit and commercial
standby letters of credit. Such financial instruments are recorded in the
financial statements when they are funded or related fees are incurred or
received. The Bank does not utilize interest-rate exchange agreements or
interest rate futures contracts.
Fair value of financial instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires disclosure of fair value information
about financial instruments, whether or not recognized in the balance sheet. In
cases where quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and, in
many cases, could not be realized in immediate settlement of the instruments.
Statement No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and cash equivalents approximate those assets' fair values.
Available-for-sale and held-to-maturity securities: Fair values for securities,
excluding restricted equity securities, are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments. The carrying values of
restricted equity securities approximate fair values.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying amounts.
The fair values for other loans are estimated using discounted cash flow
analysis, based on interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality. Loan fair value estimates include
judgments regarding future expected loss experience and risk characteristics.
Fair values for impaired loans are estimated using discounted cash flow analysis
or underlying collateral values, where applicable. The carrying amount of
accrued interest receivable approximates its fair value.
Deposit liabilities: The fair values disclosed for demand and savings deposits
are, by definition, equal to the amount payable on demand at the reporting date.
The fair values for certificates of deposit are estimated using a discounted
cash flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated contractual maturities on such time
deposits. The carrying amount of accrued interest payable approximates fair
value.
Short-term debt: The carrying amounts of short-term debt funds approximate
their fair values.
Long-term debt: The fair values of the Company's long-term debt are estimated
using discounted cash flow analysis based on the Company's current incremental
borrowing rates for similar types of borrowings.
10
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 1. Organization and Summary of Significant Accounting Policies, continued
Other liabilities: For fixed-rate loan commitments, fair value considers the
difference between current levels of interest rates and the committed rates.
The carrying amount of other liabilities approximates fair value.
Impacts of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities. This Statement
(effective for fiscal quarters beginning after June 15, 2000) establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. While the Company has not
completed its analysis of all impacts of Statement No. 133, Management does not
believe that implementation of the Statement will be material to the financial
statements.
Reclassification
Certain reclassifications have been made to the prior years' financial
statements to place them on a comparable basis with the current presentation.
Net income (loss) and stockholders' equity previously reported were not affected
by these reclassifications.
Note 2. Restricted Cash
To comply with banking regulations, the Bank is required to maintain certain
average cash reserve balances. The daily average cash reserve requirement was
approximately $323,000 and $416,000 for the periods including December 31, 1999
and 1998, respectively.
Note 3. Securities
Debt and equity securities have been classified in the consolidated balance
sheets according to management's intent. The carrying amount of securities and
their approximate fair values (all available for sale) at December 31, follow:
<TABLE>
<CAPTION>
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
1999
U. S. Treasury securities $ 97,666 $ - $ - $ 97,666
U. S. Government agency securities 11,931,756 - 417,843 11,513,913
State and local government securities 199,732 - 626 199,106
Mortgage-backed securities 2,127,226 696 68,659 2,059,263
Restricted equity securities 318,450 - - 318,450
----------- ------- -------- -----------
$14,674,830 $ 696 $487,128 $14,188,398
=========== ======= ======== ===========
1998
U. S. Treasury securities $ 696,433 $ 3,510 $ - $ 699,943
U. S. Government agency securities 14,061,220 28,654 36,294 14,053,580
State and local government securities 198,846 1,730 - 200,576
Mortgage-backed securities 1,320,977 - 7,841 1,313,136
Restricted equity securities 160,450 - - 160,450
----------- ------- -------- -----------
$16,437,926 $33,894 $ 44,135 $16,427,685
=========== ======= ======== ===========
</TABLE>
11
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 3. Securities, continued
Investment securities with amortized costs of $7,740,746 and $13,004,764 and
market values of $7,405,204 and $13,004,862 at December 31, 1999 and 1998,
respectively, were pledged as collateral on public deposits or for other banking
purposes.
Gross realized gains and losses for the years ended December 31, 1999, 1998 and
1997 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Realized gains $ 490 $ - $ 8,593
Realized losses (1,440) - (5,931)
------- ------- -------
(950) $ - $ 2,662
======= ======= =======
</TABLE>
The amortized cost and approximate market value at December 31, 1999 of
investment securities by scheduled maturity are shown below.
<TABLE>
<CAPTION>
Available for Sale
--------------------------
Amortized Fair
Cost Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 4,952,724 $ 4,946,606
Due in one year through five years 1,002,855 982,263
Due after five years 8,400,801 7,941,079
Restricted equity securities 318,450 318,450
----------- -----------
$14,674,830 $14,188,398
=========== ===========
</TABLE>
Note 4. Loans Receivable
The major components of loans in the consolidated balance sheets at December 31,
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Commercial $12,562,064 $13,557,653
Real estate:
Construction and land development 567,520 732,493
Farmland 76,300 50,974
Residential, 1-4 families 13,581,963 12,006,354
Residential, multifamily - -
Nonfarm, nonresidential 627,614 253,900
Agricultural 73,573 105,323
Consumer:
Credit cards and other revolving credit 458,225 458,541
Other consumer 3,969,530 4,229,703
States and political subdivisions 69,409 170,556
Other 5,340 3,707
----------- -----------
31,991,538 31,569,204
Net deferred loan fees (99,290) (88,528)
Allowance for loan losses (321,574) (372,574)
----------- -----------
$31,570,674 $31,108,102
=========== ===========
</TABLE>
12
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 4. Loans Receivable, continued
Nonperforming assets at December 31, 1999 and 1998 are detailed as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Nonaccrual loans $126,534 $330,048
Restructured loans - -
Loans past due 90 days or more - 86,122
-------- --------
Total nonperforming loans 126,534 416,170
Foreclosed, repossessed and idled properties 23,580 1,335
-------- --------
Total nonperforming assets $150,114 $417,505
======== ========
</TABLE>
Gross interest income that would have been recognized for each year if the
nonaccrual loans and restructured loans had been current in accordance with
their original terms and had been outstanding throughout the period or since
origination, or if held part of the period, is detailed below. Applicable
interest income that was actually collected and included in net income for each
year is summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- ------
<S> <C> <C> <C>
Nonaccrual loans:
Interest income, original terms $14,815 $35,671 $ -
======= ======= ======
Interest income, recognized $ 320 $17,113 $ -
======= ======= ======
</TABLE>
The Bank has no restructured loans during the years ended December 31, 1999,
1998 or 1997.
An allowance determined in accordance with SFAS No. 114 and No. 118 is provided
for all impaired loans. The total recorded investment in impaired loans and the
related allowance for loan losses at December 31, the average annual recorded
investment in impaired loans and interest income recognized on impaired loans
for the year (all approximate) are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
---------- --------- ---------
<S> <C> <C> <C>
Recorded investment at December 31, $ 212,601 $642,035 $ -
========= ======== ========
Allowance for loan losses $ 43,500 $102,757 $ -
========= ======== ========
Average recorded investment for the year $ 234,231 $409,174 $ -
========= ======== ========
Interest income recognized for the year $ 8,602 $ 38,516 $ -
========= ======== ========
</TABLE>
The Bank is not committed to lend additional funds to debtors whose loans have
been modified.
Note 5. Allowance for Loan Losses
An analysis of the changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Balance, beginning $ 372,574 $270,000 $155,000
--------- -------- --------
Loans charged off (224,292) (64,193) (82,476)
Recoveries - 1,216 11,533
--------- -------- --------
Net loans charged off (224,292) (62,977) (70,943)
Provision for loan losses 173,292 165,551 185,943
--------- -------- --------
Balance, ending $ 321,574 $372,574 $270,000
========= ======== ========
</TABLE>
13
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 6. Property and Equipment
Components of property and equipment and total accumulated depreciation at
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land $ 280,000 $ 280,000
Land improvements 51,492 51,492
Buildings 1,326,430 1,299,655
Furniture and equipment 749,281 608,382
---------- ----------
2,407,203 2,239,529
Less accumulated depreciation (412,922) (287,183)
---------- ----------
$1,994,281 $1,952,346
========== ==========
</TABLE>
The Company leased a branch office under an agreement accounted for as an
operating lease. This agreement expired during 1998. Rental expense relative
to this lease was approximately $11,500 and $8,477 in 1998 and 1997,
respectively.
Note 7. Short-term Debt
Short-term debt consists of federal funds purchased, which generally mature
within one to four days from the transaction date, and other short-term
borrowings. Additional information at December 31, 1999 and 1998 and for the
years then ended is summarized below:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Outstanding balance at December 31 $ - $ 851,000
=========== ==========
Year-end weighted averaged rate - 5.123%
=========== ==========
Daily average outstanding during the year $ 146,179 $ 2,332
=========== ==========
Average rate for the year 6.46% 5.123%
=========== ==========
Maximum outstanding at any month-end during the year $ 1,115,000 $ 851,000
=========== ==========
</TABLE>
At December 31, 1999, the Bank had established lines of credit totaling
$2,000,000 with various correspondent banks to provide additional liquidity if,
and as needed. In addition, the company has the ability to borrow up to ten
percent of bank assets from the Federal House Loan Bank of Atlanta, subject to
the pledging of specific collateral. $851,000 was outstanding at December
31,1998 under these agreements. There were no amounts outstanding at December
31, 1999.
Note 8. Other Borrowed Funds
Other borrowed funds consist of a mortgage note payable in monthly installments
of $1,115 including interest at 5.67%. This note is secured by certain real
estate. Annual requirements to repay this debt are as follows:
<TABLE>
<S> <C>
2000 $ 6,371
2001 6,741
2002 7,134
2003 7,549
2004 7,988
After 90,787
--------
$126,570
========
</TABLE>
14
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 9. Fair Value of Financial Instruments
The estimated fair values of the Company's financial instruments are as follows
(dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ -------- ----------- ---------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 2,897 $ 2,897 $ 2,925 $ 2,925
Federal funds sold 760 760 495 495
Securities, available-for-sale 14,188 14,188 16,428 16,428
Loans, net of allowance for loan losses 31,571 31,343 31,108 31,835
Financial liabilities
Deposits 45,777 46,188 46,117 46,650
Federal funds purchased - - 851 851
Other borrowed funds 127 114 133 126
Off-balance-sheet assets (liabilities)
Commitments to extend credit and
standby letters of credit - - - -
</TABLE>
Note 10. Earnings Per Share
The following table details the computation of basic and diluted earnings per
share for each year ended December 31.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- ---------
<S> <C> <C> <C>
Net income (loss) (income available
to common shareholders) $ 29,438 $ 24,169 $(247,250)
======== ======== =========
Weighted average common shares outstanding 926,399 892,786 546,453
Effect of diluted securities, options 22,277 24,319 -
-------- -------- ---------
Weighted average common shares
outstanding, diluted 948,676 917,105 546,453
======== ======== =========
Basic earnings per share $ .03 $ .03 $ (.45)
======== ======== =========
Diluted earning per share $ .03 $ .03 $ (.45)
======== ======== =========
</TABLE>
At December 31, 1997, exercisable options were outstanding (see Note 12) with an
exercise price below the market value of the Bank's stock at that date. This
condition placed those options "in the money" at December 31, 1997. However,
exercise of those options is not assumed in computing diluted earnings per share
for 1997 because their exercise would reduce the annual reported diluted loss
per share for that year.
15
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 11. Employee Benefit Plans
The Bank maintains a profit sharing plan pursuant to Section 401(k) of the
Internal Revenue Code. The plan covers substantially all employees who have
completed one year of service. Participants may contribute a percentage of
compensation, subject to a maximum allowed under the Code. In addition, the Bank
may make additional contributions at the discretion of Board of Directors. The
Bank made no contributions during the years ended December 31, 1999, 1998 or
1997.
Note 12. Common Stock
During 1995 the Company adopted a stock option plan under which up to 344,375
shares of stock may be issued. Shares subject to the plan may be issued in any
combination of incentive stock options, non-incentive stock options, or
restricted stock, provided that the total number of shares issuable pursuant to
incentive stock options may not be more than 62,500 without shareholder
approval. Termination of restrictions on any restricted stock granted and
expiration of any non-incentive stock options granted are controlled by the
terms of each individual grant. Incentive stock options expire no more than 10
years from the date of grant. Exercise prices of all options are determined by
each individual grant except that incentive stock options may not be granted at
less than fair market value and non-incentive stock options may not be granted
at less than 80% of fair market value on each option's respective date of grant.
Vesting of options, if not immediately exercisable, is determined in accordance
with the terms of each option granted.
Activity under the plan during the years ended December 31, 1999, 1998 and 1997
is summarized below (adjusted for the May 30, 1997 five-for-four stock split):
<TABLE>
<CAPTION>
Granted and Outstanding
--------------------------------------------------------
Available Incentive Non-incentive
for Stock Stock Restricted
Grant Options Options Stock
--------- --------- ------------- ----------
<S> <C> <C> <C> <C>
Balance December 31, 1996 131,591 - 212,784 -
Granted (6,470) - 6,470 -
Exercised - - - -
------- -------- ------- ----------
Balance December 31, 1997 125,121 - 219,254 -
------- -------- ------- ----------
Granted (6,379) - 6,379 -
Exercised - - - -
------- -------- ------- ----------
Balance December 31, 1998 118,742 - 225,633 -
------- -------- ------- ----------
Granted (5,660) - 5,660 -
Exercised - - - -
------- -------- ------- ----------
Balance December 31,1999 113,082 - 231,293 -
======= ======== ======= ==========
</TABLE>
16
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 12. Common Stock, continued
Additional information relating to the plan is listed below (adjusted for the
May 30, 1997 five-for-four stock split):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ----------
<S> <C> <C> <C>
Outstanding options at December 31:
Exercise price, beginning of the year/(1)/ $ 8.03 $ 8.00 $ 8.00
Exercise price, end of the year/(1)/ $ 8.06 $ 8.03 $ 8.00
Range of exercise prices:
From $ 8.00 $ 8.00 $ 8.00
To $ 9.13 $ 9.00 $ 8.00
Remaining contractual life in months/(1)/ 70 81 90
Exercisable options outstanding at December 31:
Number 213,293 225,633 219,254
Exercise price/(1)/ $ 8.06 $ 8.03 $ 8.00
Weighted average exercise price of options:
Granted during the year $ 9.13 $ 9.00 $ 8.00
Exercised during the year $ - $ - $ -
Forfeited during the year $ - $ - $ -
Expired during the year $ - $ - $ -
Significant assumptions used in determining fair value:
Risk-free interest rate 6.0% 6.00% 6.5%
Expected life in years 10 10 10
Expected dividends 0.0% 0.0% 0.0%
Expected volatility 5.0% 5.0% 7.6%
Grant-date fair value:
Options granted during the year $ 28,612 $ 31,787 $ 27,302
Restricted stock awards granted during the year $ - $ - $ -
Results of operations:
Compensation cost recognized in income for
all stock-based compensation awards $ - $ - $ -
======== ======== =========
Pro forma net income/(2)/ $ 826 $ (7,618) $(274,552)
======== ======== =========
Pro forma earnings per common share/(2)/ $ .00 $ (.01) $ (.50)
======== ======== =========
</TABLE>
_________________________
/(1)/ Weighted average
/(2)/ As if the fair value based method prescribed by SFAS No. 123 has been
applied.
17
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 13. Income Taxes
Operating loss and carryforwards
The Company has loss carryforwards of approximately $1,105,000 for Federal
income tax purposes that may be used to offset future taxable income. If not
previously utilized, the Federal loss carryforwards will expire between 2008 and
2012.
Current and deferred income tax components
The components of income tax expense (all Federal) are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- ---------
<S> <C> <C> <C>
Current $ - $ - $ -
Deferred 13,794 2,222 (82,364)
Deferred tax asset valuation allowance change (13,794) (2,222) 82,364
-------- ------- --------
$ - $ - $ -
======== ======= ========
</TABLE>
Rate Reconciliation
A reconciliation of income tax expense (benefit) computed at the statutory
federal income tax rate expense included in the consolidated statement of
operations follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ----------
<S> <C> <C> <C>
Tax at statutory federal rate $ 10,009 $ 8,217 $ (84,065)
Other 3,785 (5,995) 1,701
Deferred tax asset valuation allowance change (13,794) (2,222) 82,364
-------- --------- ---------
$ - $ - $ -
======== ========= =========
</TABLE>
Deferred tax analysis
The components of net deferred tax assets (all Federal) at December 31, 1999 and
1998 are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Deferred tax assets $ 477,039 $ 473,294
Deferred tax liabilities (81,435) (63,896)
Deferred tax asset valuation allowance (395,604) (409,398)
--------- ---------
$ - $ -
========= =========
</TABLE>
18
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 13. Income Taxes, continued
Tax effects of each significant item creating deferred taxes are summarized
below:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Allowance for loan losses $ 65,508 $ 92,157
Pre-operating expenses - 10,542
Net operating losses 375,647 338,862
Deferred fee income 33,762 30,133
Contributions 2,122 1,600
Accretion of discount on investment securities (1,598) (1,116)
Depreciation (79,837) (62,780)
-------- --------
$395,604 $409,398
======== ========
</TABLE>
Note 14. Commitments and Contingencies
Financial instruments with off-balance-sheet risk
The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, credit risk in excess
of the amount recognized in the consolidated balance sheets.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as for on-balance-sheet instruments.
A summary of the Bank's commitments at December 31, 1999 and 1998 are as
follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Commitments to extend credit $4,137,705 $6,340,116
Standby letters of credit - -
---------- ----------
$4,137,705 $6,340,116
========== ==========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation of the party. Collateral held varies, but may include
accounts receivable, inventory, property and equipment, residential real estate
and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending other loan facilities to customers. Collateral held
varies as specified above and is required in instances which the Bank deems
necessary.
19
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 14. Commitments and Contingencies, continued
Concentrations of credit risk
Substantially all of the Bank's loans, commitments to extend credit and standby
letters of credit have been granted to customers in the Bank's market area and
such customers are generally depositors of the Bank. The concentrations of
credit by type of loan are set forth in Note 4. The distribution of commitments
to extend credit approximates the distribution of loans outstanding. Standby
letters of credit were granted primarily to commercial borrowers. The Bank's
primary focus is toward consumer oriented and small business transactions, and
accordingly, it does not have a significant number of credits to any single
borrower or group of related borrowers in excess of $500,000. The Bank has cash
and cash equivalents on deposit with financial institutions which exceed
federally-insured limits.
Note 15. Regulatory Restrictions
Capital requirements
The Bank is subject to various regulatory capital requirements administered by
federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory (and possibly additional discretionary) actions by
regulators that, if undertaken, could have a direct material effect on the
Company's consolidated financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital to risk-weighted assets, and of Tier I
capital to average assets, as all those terms are defined in regulations.
Management believes, as of December 31, 1999, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1999, the most recent notification from the Comptroller of
the Currency categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios as set forth in the following table. There are no conditions or
events since that notification that management believes have changed the
institution's category.
Dividends
The Company's dividend payments (when available) will be made primarily from
dividends received from the Bank. Under applicable federal law, the Comptroller
of the Currency restricts national bank total dividend payments in any calendar
year to net profits of that year, as defined, combined with retained net profits
for the two preceding years. At December 31, 1999, there were no retained net
profits free of such restriction. The Comptroller also has authority under the
Financial Institutions Supervisory Act to prohibit a national bank from engaging
in an unsafe or unsound practice in conducting its business. It is possible,
under certain circumstances, the Comptroller could assert that dividends or
other payments would be an unsafe or unsound practice.
20
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 15. Regulatory Restrictions, continued
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well
Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
---------- ------ ---------- ------ ---------- --------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999
Total Capital
(to Risk-Weighted Assets) $4,274,766 14.1% * $2,426,843 * 8.0% * $3,033,553 * 10.0%
Tier I Capital
(to Risk-Weighted Assets) $3,960,766 13.1% * $1,213,421 * 4.0% * $1,820,132 * 6.0%
Tier I Capital
(to Average Assets) $3,960,766 7.9% * $2,008,367 * 4.0% * $2,510,458 * 5.0%
December 31, 1998
Total Capital
(to Risk-Weighted Assets) $3,545,948 11.3% * $2,512,294 * 8.0% * $3,140,367 * 10.0%
Tier I Capital
(to Risk-Weighted Assets) $3,180,948 10.1% * $1,256,147 * 4.0% * $1,844,220 * 6.0%
Tier I Capital
(to Average Assets) $3,180,948 6.2% * $2,066,828 * 4.0% * $2,583,535 * 5.0%
</TABLE>
* greater than or equal to
Intercompany transactions
Legal lending limits on loans by the Bank to the Company are governed by Federal
Reserve Act 23A, and differ from legal lending limits on loans to external
customers. Generally, a bank may lend up to 10% of its capital and surplus to
its parent, if the loan is secured. If collateral is in the form of stocks,
bonds, debentures or similar obligations, it must have a market value when the
loan is made of at least 20% more than the amount of the loan, and if
obligations of a state or political subdivision or agency thereof, it must have
a market value of at least 10% more than the amount of the loan. If such loans
are secured by obligations of the United States or agencies thereof, or by
notes, drafts, bills of exchange or bankers' acceptances eligible for rediscount
or purchase by a Federal Reserve Bank, requirements for collateral in excess of
loan amount do not apply. Under this definition, the legal lending limit for
the Bank on loans to the Company was approximately $397,000 at December 31,
1999. One 23A transaction existed between the Bank and the Company during the
year ended December 31, 1998.
On October 31, 1997, the Company acquired a future banking site at public
auction. The Company borrowed $158,179 from the Bank to complete the purchase.
This loan was repaid to the bank on July 7, 1998.
Note 16. Transactions with Related Parties
The Bank has entered into transactions with its directors, significant
shareholders and their affiliates (related parties). Such transactions were made
in the ordinary course of business on substantially the same terms and
conditions, including interest rates and collateral, as those prevailing at the
same time for comparable transactions with other customers, and did not, in the
opinion of management, involve more than normal credit risk or present other
unfavorable features.
21
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 16. Transactions with Related Parties, continued
Aggregate loan transactions with related parties were as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Balance, beginning $1,534,518 $1,424,644
Change in relationship (346,815) -
New loans and advances 1,143,300 486,879
Repayments (658,562) (377,005)
---------- ----------
Balance, ending $1,672,441 $1,534,518
========== ==========
</TABLE>
During 1997 and part of 1998 the Company leased office space which was used as a
branch location under the terms of an agreement accounted for as an operating
lease. The lessor is a partnership in which one of the Company's former
directors is a partner. Rent expense recognized under this lease in 1998 and
1997 was $11,500 and $8,477, respectively.
Note 17. Parent Company Financial Information
Condensed financial information of CNB Holdings, Inc. is presented as follows:
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and due from banks $ 1,730,122 $ 2,308,786
Loans, net of allowance of $7,574 569,661 749,818
Investment in subsidiary bank at equity 3,486,719 3,170,595
Other assets 6,477 18,533
----------- -----------
Total assets $ 5,792,979 $ 6,247,732
=========== ===========
Liabilities
Accounts payable and other liabilities - 8,000
----------- -----------
Stockholders' equity:
Common stock 4,631,995 4,631,995
Surplus 2,803,782 2,803,782
Retained deficit (1,156,366) (1,185,804)
Unrealized depreciation on subsidiary's investment
securities available for sale (486,432) (10,241)
----------- -----------
Total stockholders' equity 5,792,979 6,239,732
----------- -----------
Total liabilities and stockholders' equity $ 5,792,979 $ 6,247,732
=========== ===========
</TABLE>
22
<PAGE>
================================================================================
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Note 17. Parent Company Financial Information, continued
Statements of Operations
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------- -------- ---------
<S> <C> <C> <C>
Income:
Interest on loans $56,501 $ 16,928 $ -
Interest on deposits with banks - - 6,118
Other income - 5,544 110
------- -------- ---------
56,501 22,472 6,228
------- -------- ---------
Expenses:
Professional fees 19,006 20,715 44,199
Interest - 6,723 -
Other expenses 43,373 45,136 14,783
------- -------- ---------
Total expenses 62,379 72,574 58,982
------- -------- ---------
Loss before tax benefit and equity in undistributed
income of subsidiary (5,878) (50,102) (52,754)
Federal income tax benefit - - -
------- -------- ---------
Loss before equity in undistributed income of
subsidiary (5,878) (50,102) (52,754)
Equity in undistributed income (loss) of subsidiary 35,316 74,271 (194,496)
------- -------- ---------
Net income (loss) $29,438 $ 24,169 $(247,250)
======= ======== =========
</TABLE>
Statements of Cash Flows
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 29,438 $ 24,169 $(247,250)
Adjustments:
Loan loss provision - 7,574 -
Depreciation and amortization 10,299 18,249 7,724
Increase in equity in undistributed loss of subsidiary (35,316) (74,271) 194,496
Increase in other assets 1,757 (8,024) 467
Increase (decrease) in other liabilities (8,000) 3,104 (6,769)
---------- ---------- ---------
Net cash provided (used) by operating activities (1,822) (29,199) (51,332)
---------- ---------- ---------
Cash flows from investing activities:
Investment in subsidiary (757,000) - -
Purchase of property and equipment - (94,961) (190,420)
Net (increase) decrease in loans 180,158 (757,392) -
---------- ---------- ---------
Net cash provided (used) by investing activities 576,842 (852,353) (190,420)
---------- ---------- ---------
Cash flows from financing activities:
Issuance of common stock - 3,420,000 -
Net intercompany borrowings - - 158,178
Stock issuance costs - (258,498) (67,468)
Redemption of fractional shares - - (1,164)
---------- ---------- ---------
Net cash provided by financing activities - 3,161,502 89,546
---------- ---------- ---------
Increase (decrease) in cash and due from banks (578,664) 2,279,950 (152,206)
Cash and cash equivalents, beginning 2,308,786 28,836 181,042
---------- ---------- ---------
Cash and cash equivalents, ending $1,730,122 $2,308,786 $ 28,836
========== ========== =========
</TABLE>
23
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following presents management's discussion and analysis of the consolidated
financial condition and results of operations of the Company as of the dates and
for the periods indicated. This discussion should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto.
The Consolidated Financial Statements include the financial information of the
Company and the Bank. As the Bank represents substantially all of the Company's
activities, comparative discussions of consolidated versus non-consolidated
financial statements are unnecessary.
The Company is not aware of any current recommendations by regulatory
authorities which, if implemented, would have a material effect on its
liquidity, capital resources or results of operations. There are no agreements
between the Company and either the OCC or the Federal Reserve Board, nor has
either regulatory agency made any recommendations concerning the operations of
the Company that could have a material effect on its liquidity, capital
resources or results of operations.
Overview
The Company commenced operations on March 8, 1993, while the Bank began
operations on August 29, 1994. The Company's sole subsidiary, the Bank,
operates by attracting deposits from the general public and using such deposit
funds to make commercial, consumer, and residential construction and permanent
mortgage real estate loans. Revenues are derived principally from interest on
loans and investments. Changes in the volume and mix of these assets and
liabilities, as well as changes in the yields earned and rates paid, determine
changes in net interest income.
The size of the Company remained relatively constant in 1999 as assets decreased
3%. The Company's assets increased over 34% in 1998 and over 45% in 1997.
Total assets decreased to $51.8 million as compared to $53.4 million at December
31, 1998. Total deposits were $45.7 million at December 31, 1999 compared to
$46.1 million at December 31, 1998. The Bank's net loans remained constant in
1999. Loans increased over 39% in 1998, and over 75% in 1997.
During 1997 the Company filed for, and received approval from the SEC for a
secondary stock offering of up to 380,000 shares of common stock at a price of
$9 per share. The stock sale was closed February 10, 1998 after the sale of
380,000 shares for net proceeds of approximately $3.1 million. Other significant
events that occurred during 1997 were the opening of Community National Bank's
first branch in downtown Pulaski in October and the purchase of a building for a
future site to house the branch and to provide for anticipated growth.
During 1998 the Company dedicated CNB Center, a 19,000 square foot, three story
building in downtown Pulaski. CNB Center contains a full service branch and the
operations center for the Bank. Excess space on the second and third floors is
currently leased and will provide the Company with an option for future
expansion without a significant amount of capital expenditures.
24
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Net Interest Income and Average Balances (thousands)/(1)/
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------------------------------
1999 1998 1997
------------------------- --------------------------- ------------------------------
Interest Interest Interest
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost Balance Expense Cost
------- -------- ------ ------- -------- ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Investment securities $13,515 $ 831 6.15% $13,563 $ 800 5.90% $12,242 $ 746 6.09%
Federal funds sold 1,080 57 5.28 4,112 218 5.30 691 40 5.79
Loans, net 31,950 2,760 8.64 25,454 2,323 9.13 17,652 1,668 9.45
------- ------- ---- ------- ------- ---- ------- ------- ----
Total 46,545 3,648 43,129 3,341 30,585 2,454
------- -------
Yield on average
interest-earning assets 7.83% 7.75% 8.02%
==== ==== ====
Noninterest-earning assets:
Cash and due from banks 3,294 2,447 2,106
Premises and equipment 1,957 1,897 1,556
Interest receivable and other 416 431 430
------- ------- -------
Total
noninterest-earning assets 5,667 4,775 4,092
------- ------- -------
Total assets $52,212 $47,904 $34,677
======= ======= =======
Interest-bearing liabilities:
Demand deposits $11,052 465 4.21% $12,890 506 3.93% $ 8,094 327 4.04%
Savings deposits 7,414 239 3.22 5,818 209 3.59 3,501 123 3.51
Time deposits 21,370 1,109 5.20 19,887 1,095 5.51 16,553 904 5.46
Federal funds purchased 146 11 7.53 - - - - - -
Other borrowed funds 129 7 5.43 74 4 5.41 308 17 5.52
------- ------- ---- ------- -------- ---- ------- ------- ----
Total interest-bearing liabilities 40,111 1,831 38,669 1,814 28,456 1,371
------- ------- ------- -------- ------- -------
Cost of average
interest-bearing liabilities 4.56% 4.69% 4.82%
==== ==== ====
Noninterest-bearing liabilities:
Demand deposits 5,711 3,117 2,909
Interest payable and other 374 167 122
------- ------- -------
Total
noninterest-bearing
liabilities 6,085 3,284 3,031
------- ------- -------
Total liabilities 46,196 41,953 31,487
Stockholders' equity 6,016 5,951 3,190
------- ------- -------
Total liabilities and
stockholders' equity $52,212 $47,904 $34,677
======= ======= =======
Net interest income $ 1,817 $ 1,527 $ 1,083
======= ======== =======
Net yield on
interest-earning assets 3.90% 3.54% 3.54%
==== ==== ====
</TABLE>
________________
(1) Income and yields are computed on a tax equivalent basis.
25
<PAGE>
================================================================================
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Net Interest Income
Net interest income, the principal source of income for the Company and the
Bank, is the amount of income generated by earning assets (primarily loans and
investment securities) less the interest expense incurred on interest-bearing
liabilities (primarily deposits used to fund earning assets). Changes in the
volume and mix of interest-earning assets and interest-bearing liabilities, as
well as their respective yields and rates, have a significant impact on the
level of net interest income. The preceding table presents the average balances
of total interest-earning assets and total interest-bearing liabilities for the
periods indicated, showing the average distribution of assets, liabilities and
stockholders' equity, and the related income, expense, and corresponding
weighted average yields and costs. The average balances used for the purposes of
this table and other statistical disclosures were calculated by using the daily
average balances.
During 1999 interest income increased $306,000, or 9.2% over 1998. Interest
income for 1998 increased to $3.3 million, a 36.1% increase over the 1997 amount
of $2.5 million. The increases in interest income during 1999, 1998 and 1997 are
due to increases in average interest-earning assets in both years while yields
on these assets remained relatively constant. Average earning assets were $46.5
million during 1999. This was an increase of 7.9%. Average earning assets were
$43.1 million during 1998, an increase of $12.5 million over the 1997 average of
$30.6 million. Yields on interest-earning assets during 1999, 1998 and 1997 were
within a range of 27 basis points. Those yields were 7.83%, 7.75% and 8.02%,
respectively.
Interest rates charged on loans vary with the degree of risk, maturity and
amount of the loan. Competitive pressures, money market rates, availability of
funds, and government regulation also influence interest rates. On average,
loans yielded 8.64% in 1999 compared to 9.13% in 1998 compared to 9.45% in 1997,
reflecting an increase in 1-4 family residential mortgage loans as a percentage
of the overall loan portfolio.
Interest expense was $1.8 million in 1999, unchanged from 1998. Interest
expense increased by 32.3% in 1998 to $1.8 million from $1.4 million in 1997.
Interest expense increased by $517,000 in 1997 to $1.4 million. These increases
were due to increases in average interest-bearing liabilities during 1999, 1998
and 1997. During 1999 the average rate paid on interest-bearing liabilities was
4.56%. The rate paid on interest-bearing liabilities decreased 13 basis points
during 1998 to 4.69%. This decrease was due in part to the Bank utilizing
Federal funds to provide short-term liquidity to a lesser extent in 1999 and
1998. The rate paid on interest-bearing liabilities increased 15 basis points
during 1997, as the bank paid higher rates on large demand deposit accounts.
Net interest income increased $290,000 to $1.8 million in 1999. Net interest
income increased 41% in 1998 and over 50% in 1997. Net interest income was
$1.5 million and $1.1 million in 1998 and 1997 respectively. These increases
were due to increases in the volume of net average earning assets in all three
years. Net interest margin increased to 3.90% in 1999 from 3.63% in 1998 and
1997. Net interest margin declined in 1997 and held constant in 1998 even though
net interest income increased. This is because of increases in the percentage
of average interest-bearing liabilities to average interest-earning assets. The
effects of changes in volumes and rates on net interest income for various
periods are shown in the following table.
26
<PAGE>
================================================================================
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Rate/Volume Variance Analysis (thousands)
1999 Compared to 1998 1998 Compared to 1997
--------------------------------------- ---------------------------------------
Interest Interest
Income/ Income/
Expense Variance Attributable To Expense Variance Attributable To
Variance -------------------------- Variance --------------------------
--------- Rate Volume --------- Rate Volume
---- ------ ---- ------
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Taxable investment securities $ 31 $ 34 $ (3) $ 54 $ (26) $ 80
Federal funds sold (161) - (161) 178 (20) 198
Loans 437 (156) 593 655 (82) 737
-------- ------- ------- -------- ------- -------
Total 307 (122) 429 887 (128) 1,015
-------- ------- ------- -------- ------- -------
Interest-bearing liabilities:
Demand deposits (41) 31 (72) 179 (15) 194
Savings deposits 30 (27) 57 86 5 81
Time deposits 14 (68) 82 191 9 182
Short-term borrowings 14 3 11 (13) - (13)
-------- ------- ------- -------- ------- -------
Total 17 (61) 78 443 (1) 444
-------- ------- ------- -------- ------- -------
Net interest income $ 290 $ (61) $ 351 $444 $(127) $ 571
======== ======= ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 Compared to 1996
-------------------------------------
Interest
Income/
Expense Variance Attributable To
Variance -------------------------
--------- Rate Volume
----- ------
<S> <C> <C> <C>
Interest-earning assets:
Taxable investment securities $168 $ (44) $212
Federal funds sold (31) (2) (29)
Loans 742 (18) 760
-------- ------- -------
Total 879 (64) 943
======== ======= =======
Interest-bearing liabilities:
Demand deposits 136 36 100
Savings deposits 35 (13) 48
Time deposits 329 17 312
Short-term borrowings 17 17 -
-------- ------- -------
Total 517 57 460
Net interest income $362 $(121) $483
======== ======= =======
</TABLE>
Provision for Loan Losses
The provision for loan losses is charged to income in an amount necessary to
maintain an allowance for loan losses adequate to provide for expected losses in
the Bank's loan portfolio. The level of the allowance for loan losses is
determined by management's assessment of a variety of factors, including the
collectibility of past due loans, volume of new loans, composition of the loan
portfolio, and general economic outlook. Loan losses and recoveries are charged
or credited directly to the allowance for loan losses.
Management increased the provision for loan losses to $173,000 in 1999 from
$166,000 in 1998. The provision was and $186,000 in 1997. The increase in the
loan loss provision was made because of increased charge-offs in the loan
portfolio during 1999. The Bank's allowance for loan losses as a percentage of
gross loans was 1.0% at the end of 1999 and 1.2% at the end of 1998 and 1997.
Additional information regarding loan loss provisions is discussed in
"Nonperforming and Problem Assets."
Noninterest Income
Noninterest income consists of revenues generated from a variety of financial
services and activities. The majority of noninterest income is a result of
service charges on deposit accounts including charges for insufficient funds,
checks and fees charged for non-deposit services. Noninterest income also
includes fees charged for various bank services such as safe deposit box rental
fees and letter of credit fees and secondary market mortgage loan origination
fees. A portion of noninterest income is gains on the sale of investment
securities. Although the Bank generally follows a buy and hold philosophy with
respect to investment securities, occasionally the need to sell some investment
securities is created by changes in market rate conditions or by efforts to
restructure the portfolio to improve the Bank's liquidity or interest rate risk
positions.
Noninterest income decreased 3.6% to $265,000 during 1999. Noninterest income
totaled $275,000 in 1998, a increase of 80.1% from the $153,000 recorded in
1997. Noninterest income in 1997 increased 20.5%. The majority of the increase
in noninterest income in 1998 and 1999 was due to increased service charges on
deposit accounts because of the increased number of accounts and new products.
Also, in 1998 the bank began originating home mortgages for placement in the
secondary market and received $28,000 and $27,000 in fee income in 1999 and
1998, respectively.
27
<PAGE>
================================================================================
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
The Bank's fee structure is reviewed annually to determine if adjustments to
fees are warranted. The last fee adjustment was made in the fourth quarter of
1999. Management believes that the current fee structure is competitive in the
Bank's market.
The sources of noninterest income for the past three years are summarized in the
table below.
Sources of Noninterest Income (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------------
1999 1998 1997
------------------- ---------------- ------------------
<S> <C> <C> <C>
Service charges in deposit accounts $ 167 $ 169 $ 112
Gain on sale of investment securities (1) - 3
Mortgage loan origination fees 28 27 -
Administration fees 13 13 -
Other 58 66 38
------------------- ---------------- ------------------
Total noninterest income $ 265 $ 275 $ 153
=================== ================ ==================
</TABLE>
Noninterest Expense
Noninterest expense increased $267,000, or 16.6% to $1.9 million in 1999.
Noninterest expense for 1998 rose 315,000 or 24.3% to $1.6 million. Noninterest
expense in 1997 was $1.3 million. The overhead ratio of noninterest expense to
adjusted total revenues (net interest income plus noninterest income excluding
securities transactions) was 90% in 1999 and 1998 and 105% in 1997.
Total personnel expenses, the largest component of noninterest expense,
increased 45,000 or 6.0% during 1999. During 1998 personnel expenses increased
$163,000 to $748,000. Personnel expenses for 1997 were $585,000, These increases
were attributable to the increased number of full time equivalent employees
required due to the high growth rate the Bank has experienced in 1998 and 1997.
Total full time equivalent employees were 25, 30 and 25 at December 31, 1999,
1998 and 1997. Management expects the number of full-time equivalent employees
to remain constant through 2000.
Combined occupancy and furniture and equipment expense remained relatively
constant at $252,000 during 1999 and increased $72,000 or 42.0% to $244,000 in
1998. Those expenses increased $33,000 in 1997. The increase in 1998 was due
primarily to the opening of CNB Center, a 19,900 square foot facility that is
used as a branch and office space that is leased to various unrelated entities.
The reason for the increase in 1997 was the completion of the second floor of
the main Bank building to provide additional operations space.
Professional services expense, fees paid to attorneys, independent auditors,
consultants and bank examiners increased to $80,000 during 1999. During 1998
these expenses decreased to $39,000 or 55.2% under the 1997 amount. The increase
in 1999 is due to the decision to outsource certain functions that were
performed in-house in 1998 and increased bank examiner's fees. The increase in
1997 is due primarily to the loss of the Company's senior vice president of
operations late in 1996, forcing the Company to outsource portions of the
responsibilities formerly performed by that position in 1997.
Data processing services consisting primarily of account processing, credit card
processing fees, and product licensing fees increased $44,000 or 27.3% during
1999 due to the addition of new products. These expenses increased $13,000 or
8.8% during 1998 to $161,000. These expenses increased $49,000 to $148,000 in
1997. These fees relate directly to the number of accounts serviced and
transactions processed. Management expects these expenses to continue to
increase as the Bank grows.
28
<PAGE>
================================================================================
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Noninterest expense has increased over the past two years and will most likely
continue to increase as the Bank grows. However, as the Bank becomes more
mature, growth in net interest income will outpace growth in noninterest
expense. Accordingly, management believes the Bank's overhead ratio will
continue to improve. The primary elements of noninterest expense for the past
three years are as summarized in the following table.
Sources of Noninterest Expense (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------------
1999 1998 1997
------------------ ---------------- ------------------
<S> <C> <C> <C>
Salaries and wages $ 686 $ 652 $ 515
Employee benefits 107 96 70
------------------ ---------------- ------------------
Total personnel expense 793 748 585
Occupancy expense 139 121 80
Furniture and equipment 113 124 92
Printing and supplies 132 95 72
Professional services 80 39 87
Postage 44 41 31
Telephone 23 22 15
Dues and subscriptions 12 19 18
Education and seminars 17 21 13
Advertising and public relations 46 56 40
Insurance expense 78 31 26
Bank franchise tax 6 9 13
Data processing 205 161 148
Stock transfer agent fees 7 8 9
Amortization of organizational cost 18 29 22
Year 2000 testing 28 23 -
Other operating expense 138 65 46
------------------ ---------------- ------------------
Total other expenses $ 1,879 $ 1,612 $ 1,297
================== ================ ==================
</TABLE>
Year 2000 Compliance
Like most financial service providers, the Company and the operations of the
Bank had the potential to be significantly affected by the Y2K issue due to its
dependence on technology and sensitive data. Computer software, hardware and
other equipment, both within and outside the Bank's direct control, and third
parties with whom the Bank electronically or operationally interfaces (including
without limitation its customers and third party vendors) were likely to be
affected. If computer systems were not modified in order to be able to identify
the year 2000, many computer applications could have failed or could adversely
affect the viability of the Bank's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Y2K
issue could have resulted in a significant adverse impact of the Bank's
operations and, in turn, the financial condition and results of operations of
the Company.
Management formulated a Y2K Team, a significant part of the team's efforts were
monitoring the Bank's data processor's Y2K project closely. The data processor
had substantially completed renovating and testing its mission-critical
mainframe and PC-based applications by year-end 1998. The Bank actively
participated in testing the significant loan and deposit systems.
Y2K related expense was $28,000 in 1999 and $23,000 in 1998. Management believes
that future Y2K expenses will not be material to operations in the future.
29
<PAGE>
================================================================================
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Income Taxes
Income tax expense is based on amounts reported in the statements of income
(after adjustments for non-taxable income and non-deductible expenses) and
consists of taxes currently due plus deferred taxes on temporary differences in
the recognition of income and expense for tax and financial statement purposes.
The deferred tax assets and liabilities represent the future Federal income tax
return consequences of those differences, which will either be taxable or
deductible when the assets and liabilities are recovered or settled.
The Company's deferred income tax benefits and liabilities are the result of
temporary differences in loss carryforwards, provisions for loan losses,
valuation reserves, depreciation, deferred income, and investment security
discount accretion.
Net deferred income tax assets of $395,000, $409,000 and $411,000 at December
31, 1999, 1998, and 1997, respectively, are offset by a valuation allowance.
Accordingly, no income tax expense or benefit was reported during 1999, 1998 or
1997.
Earning Assets
Average earning assets were $46.5 million during 1999, an increase of 7.9% over
1998. Average earning assets increased $12.5 million, or 41.0%, during 1998 to
$43.1 million. Average earning assets increased $10.8 million to $30.6 million
during 1997. Total average earning assets represented 89.2% of total average
assets in 1999. This decreased from 90.0% of total average assets in 1998. The
mix of average earning assets changed during 1999, 1998 and 1997 with a larger
portion of the Bank's funds being invested in higher yielding loans. For 1999,
average net loans represented 61.2% of average assets. This is a significant
increase from 53.1% in 1998. Average investment securities decreased to 25.9%
of total average assets during 1999. This number was down from 28.3% in 1998
and 35.3% in 1997. Average noninterest earning assets increased to $5.7 million
from $4.8 million in 1998 and $4.1 million in 1997.
A summary of average assets is shown in the following table.
Average Asset Mix (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1999 1998 1997
---------------- ---------------- -----------------
Average Average Average
Balance Percent Balance Percent Balance Percent
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Earnings assets:
Loans, net $31,950 61.19% $25,454 53.14% $17,652 50.90%
Investment securities 13,515 25.88 13,563 28.31 12,242 35.30
Federal funds sold 1,080 2.08 4,112 8.58 691 1.99
------- ------ ------- ------ ------- ------
Total earning assets 46,545 89.15 43,129 90.03 30,585 88.19
------- ------ ------- ------ ------- ------
Nonearning assets:
Cash and due from banks 3,294 6.31 2,447 5.11 2,106 6.07
Premises and equipment 1,957 3.75 1,897 3.96 1,556 4.49
Other assets 416 .79 431 .90 430 1.25
------- ------ ------- ------ ------- ------
Total nonearning assets 5,667 10.85 4,775 9.97 4,092 11.81
------- ------ ------- ------ ------- ------
Total assets $52,212 100.00% $47,904 100.00% $34,677 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
30
<PAGE>
================================================================================
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
Loans
The Bank makes both consumer and commercial loans to borrowers in all
neighborhoods within its market area, including the low- and moderate-income
areas. The Bank's market area is generally defined to be all or portions of the
Pulaski, Giles, Wythe, Montgomery and Bland Counties of Virginia and the City of
Radford, Virginia. The Bank emphasizes consumer based installment loans,
commercial loans to small and medium sized businesses and real estate loans.
Net loans consist of total loans less unearned income and the allowance for loan
losses. Average net loans increased 25.5% to $32.0 million in 1999 and 44.2% to
$25.5 million during 1998. This was the fifth consecutive year of loan growth.
Average net loans increased to $17.7 million during 1997. The increase in
average net loans outstanding during the past years is due to the efforts of the
Bank's management, increases in loan demand and to the Bank's growing reputation
in the community.
A significant portion of the loan portfolio, $14.9 million or 46.3%, is made up
of loans secured by various types of real estate. Total loans secured by one to
four family residential properties represented 42.5% and 38.0% of total loans at
the end of 1999 and 1998, respectively. During 1999, the Bank experienced a
decline in loans for commercial and business purposes. These loans decreased
7.3% during 1999 to a total of $12.6 million, or 39.2% of total loans
outstanding compared to a total of $13.6 million or 43.0% at the end of 1998.
The amounts of loans outstanding by type at December 31, 1999 and 1998 are shown
in the following table.
Loan Portfolio Summary (thousands)
<TABLE>
<CAPTION>
December 31,
1999 December 31, 1998
---------------- ------------------
Amount % Amount %
------- ------ -------- -------
<S> <C> <C> <C> <C>
Construction and
development $ 567 1.77% $ 732 2.32%
Farmland 76 .25 51 .16
1-4 family residential 13,582 42.45 12,006 38.03
Multifamily residential - -
Nonfarm, nonresidential 628 1.96 254 .80
------- ------ -------- -------
Total real estate 14,853 46.43 13,043 41.31
Agricultural 74 .23 105 .33
Commercial and industrial 12,562 39.27 13,558 42.92
Credit cards and other revolving credit 458 1.43 459 1.45
Other consumer 3,970 12.41 4,230 13.40
State and political subdivisions 69 .21 170 .54
Other 6 .02 4 .02
------- ------ -------- -------
Total $31,992 100.00% $ 31,569 100.00%
======= ====== ======== =======
</TABLE>
31
<PAGE>
================================================================================
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
The maturity distribution of variable and fixed rate loans as of December 31,
1999 are set forth in the following table.
Maturity Schedule of Loans (thousands)
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------
Commercial
Financial and Real Total
----------------
Agriculture Estate Others Amount %
------------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Fixed rate loans:
Three months or less $ 395 $ 59 $ 274 $ 728 2.27%
Over three months to twelve months 584 726 674 1,984 6.20
Over one year to five years 1,612 1,075 3,074 5,761 18.01
Over five years 337 126 323 786 2.46
------- ------- ------ ------- ------
Total fixed rate loans 2,928 1,986 4,345 9,259 28.94
------- ------- ------ ------- ------
Variable rate loans:
Three months or less 2,765 813 78 3,656 11.43
Over three months to twelve months 382 675 70 1,127 3.52
Over one year to five years 6,561 11,379 10 17,950 56.11
Over five years - - - - -
------- ------- ------ ------- ------
Total variable rate loans 9,708 12,867 158 22,733 71.06
------- ------- ------ ------- ------
Total loans:
Three months or less 3,160 872 352 4,384 13.70
Over three months to twelve months 966 1,401 744 3,111 9.72
Over one to five years 8,173 12,454 3,084 23,711 74.12
Over five years 337 126 323 786 2.46
------- ------- ------ ------- ------
Total loans $12,636 $14,853 $4,503 $31,992 100.00%
======= ======= ====== ======= ======
</TABLE>
Investment Securities
The Bank uses its investment portfolio to provide liquidity for unexpected
deposit decreases, to fund loans, to meet the Bank's interest rate sensitivity
goals, and to generate income.
Securities are classified as securities held to maturity when management has the
intent and the Company has the ability at the time of purchase to hold the
securities to maturity. Securities held to maturity are carried at cost
adjusted for amortization or premiums and accretion of discounts. Securities to
be held for indefinite periods of time are classified as securities available
for sale. Unrealized gains and losses on securities available for sale are
recognized as direct increases or decreases in shareholders' equity. Securities
available for sale include securities that may be sold in response to changes in
market interest rates, changes in the security's prepayment risk, increases in
loan demand, general liquidity needs and other similar factors. The entire
securities portfolio is classified as available for sale.
Management of the investment portfolio has always been conservative with
virtually all investments taking the form of purchases of U.S. Treasury, U.S.
Government agency and State and local bond issues. Management views the
investment portfolio as a source of income, and purchases securities with that
in mind. However, adjustments are necessary in the portfolio to provide an
adequate source of liquidity which can be used to meet funding requirements for
loan demand and deposit fluctuations and to control interest rate risk.
Therefore, management may sell certain securities prior to their maturity.
The table on the following page presents the investment portfolio at December
31, 1999 by major types of investments and maturity ranges. Maturities may
differ from scheduled maturities in mortgage-backed securities because the
mortgages underlying the securities may be called or repaid prior to the
scheduled maturity date. Maturities on all other securities are based on the
contractual maturity.
Investment Securities (thousands)
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
32
<PAGE>
================================================================================
Management's Discussion and Analysis
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Amortized Cost Due
------------------------------------------
After One After Five After
In One Yr. Through Through Ten Equity Fair
or Less Five Yrs. Ten Yrs. Years Securities Total Value
---------- --------- ---------- ------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury $ 98 $ - $ - $ - $ - $ 98 $ 98
U. S. Government agencies 4,655 1,003 6,274 - - 11,932 11,514
State and political subdivisions 200 - - - - 200 199
Mortgage-backed securities - - 993 1,134 - 2,127 2,059
Equity securities - - - - 318 318 318
------ --------- ------ ------ ----- ------- -------
Total $4,953 $1,003 $7,267 $1,134 $ 318 $14,675 $14,188
====== ========= ====== ====== ===== ======= =======
Weighted average yields:
U.S. Treasury 5.28% -% -% -% 5.28%
U.S. Government agencies 5.70 5.89 5.90 - 5.83
State and political subdivisions 6.38 - - - 6.38
Mortgage-backed - - 6.28 6.01 6.14
------ --------- ------ ------ -------
Consolidated 5.72% 5.89% 5.95% 6.01% 5.88%
====== ========= ====== ====== =======
</TABLE>
The rising interest rate environment in 1999 caused the average yield on the
investment portfolio to increase to 6.2% from 5.9% in 1998. At December 31,
1999, the market value of the investment portfolio was $14.2 million,
representing depreciation of $486,000 below amortized cost. This compared to a
market value of $16.4 million and a depreciation of $10,000 below amortized cost
a year earlier.
Federal Funds Sold
Federal funds represent the most liquid portion of the Bank's invested funds and
generally the lowest yielding portion of earning assets. Management has made an
effort to maintain Federal funds at the lowest level possible consistent with
prudent interest rate risk management strategies and liquidity needs.
Average Federal funds sold were $1.1 million in 1999, a decrease of $3.0 million
or 73.7% from 1998. Average Federal funds sold were $4.1 million in 1998, an
increase of $3.4 million over the 1997 average. Average Federal funds sold
totaled $691,000 in 1997. Average Federal funds sold were 2.1%, 5.3% and 2.0%
of total average interest-earning assets in 1999, 1998 and 1997, respectively.
Deposits
The Bank relies on deposits generated in its market area to provide the majority
of funds needed to support lending activities and for investments in liquid
assets. More specifically, core deposits (total deposits less time deposits in
denominations of $100,000 or more) are the primary funding source.
The Bank's balance sheet growth is largely determined by the availability of
deposits in its markets, the cost of attracting the deposits, and the prospects
of profitably utilizing the available deposits by increasing the loan or
investment portfolios. Market conditions have resulted in depositors shopping
for better deposit rates more than in the past. An increased customer awareness
of interest rates adds to the importance of rate management. The Bank's
management must continuously monitor market pricing, competitor's rates, and
internal interest rate spreads to maintain the Bank's growth and profitability.
The Bank attempts to structure rates so as to promote deposit and asset growth
while at the same time increasing the overall profitability of the Bank.
33
<PAGE>
===============================================================================
Management's Discussion and Analysis
- -------------------------------------------------------------------------------
Average total deposits were $45.6 million in 1999 which represents an increase
of 9.2% over 1998. Average total deposits were $41.7 million during 1998, an
increase of 34.3% over 1997. Average total deposits for the year ended December
31, 1997 amounted to $31.1 million which was an increase of $11.3 million, or
56.9%. Average core deposits totaled $41.3 million in 1999 and $37.2 million in
1998, an increase of $4.1 million, or 11.0%. The percentage of the Bank's
average deposits that are interest-bearing decreased to 87.5% from 92.5% in
1998. Average demand deposits which earn no interest increased $2.6 million to
$5.7 million in 1999 as compared to 1998.
The average certificates of deposit issued in denominations of $100,000 or more
decreased to $4.2 million in 1999 from $4.5 million in 1998. Average
certificates of deposit issued in denominations of $100,000 or more as a
percentage of total average deposits were 9.3%, 10.8% and 18.5% for the years
ended December 31, 1999, 1998 and 1997, respectively.
Large municipal deposits from local governments were $13.4 million and $12.5
million at December 31, 1999 and 1998, respectively. Management believes that
the Bank is paying market rates for these deposits. Management's strategy has
been to support loan and investment growth with core deposits and not to
aggressively solicit the more volatile, large denomination certificates of
deposit. Large denomination certificates of deposit and large municipal
deposits are particularly sensitive to changes in interest rates. Management
considers these deposits to be volatile and invests these funds in order to
minimize liquidity and interest rate risks.
Average deposits for the three years ended December 31, 1999, 1998 and 1997 are
summarized in the following table.
Deposit Mix (thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------
1999 1998 1997
---------------- ----------------- -----------------
Average Average Average
Balance Percent Balance Percent Balance Percent
------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits:
Now accounts $11,052 24.27% $12,890 30.90% $ 8,094 26.06%
Money market 4,543 9.97 3,393 8.13 1,805 5.81
Savings 2,871 6.30 2,425 5.81 1,696 5.46
Small denomination certificates 17,140 37.63 15,379 36.88 10,817 34.83
Large denomination certificates 4,230 9.29 4,508 10.81 5,736 18.47
------- ------- -------- ------- -------- -------
Total interest bearing deposits 39,836 87.46 38,595 92.53 28,148 90.63
Noninterest bearing deposits:
Demand deposits 5,711 12.54 3,117 7.47 2,909 9.37
------- ------- -------- ------- -------- -------
Total deposits $45,547 100.00% $41,712 100.00% $31,057 100.00%
======= ======= ======== ======= ======== =======
</TABLE>
The following table provides maturity information relating to time deposits of
$100,000 or more at December 31, 1999 and 1998.
Large Time Deposit Maturities, (thousands)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Remaining maturity of three months or less $ 1,821 $ 2,054
Remaining maturity over three through twelve months 1,017 1,241
Remaining maturity over twelve months 1,203 1,788
-------- --------
Total time deposits of $100,000 or more $ 4,041 $ 5,083
======== ========
</TABLE>
34
<PAGE>
================================================================================
Management's Discussion and Analysis
- -------------------------------------------------------------------------------
Other Borrowed Funds
Other borrowed funds consist of a mortgage loan of $127,000 and $133,000 at
December 31, 1999 and 1998, respectively. The average balance for 1999 was
$129,000. Interest expense was $7,000 for a cost of funds of 5.4% in both
years.
The Bank had no short-term debt at December 31, 1999. The average balance of
Federal funds purchased was $146,000 in 1999. There were no Federal funds
purchased in 1998. The related interest expense on these borrowings was $11,000
for a cost of funds of 6.5% in 1999.
Capital Adequacy
Regulatory guidelines relating to capital adequacy provide minimum risk-based
ratios which assess capital adequacy while encompassing all credit risks,
including those related to off-balance sheet activities. Capital ratios under
these guidelines are computed by weighing the relative risk of each asset
category to derive risk-adjusted assets. The risk-based capital guidelines
require minimum ratios of core (Tier I) capital (common stockholders' equity and
qualifying preferred stockholders' equity, less intangible assets) to risk-
weighted assets of 4.0% and total regulatory capital (core capital plus
allowance for loan losses up to 1.25% of risk-weighted assets and qualifying
subordinated debt) to risk-weighted assets of 8.0%. See "Supervision and
Regulation."
In addition, a minimum leverage ratio of average Tier I capital to average total
assets for the previous quarter, ranging from 3% to 5%, is required by federal
bank regulators subject to the regulator's evaluation of the Bank's overall
safety and soundness. As of December 31, 1999, the Bank had a ratio of year-end
Tier I capital to average total assets for the fourth quarter of 7.9%. The Bank
exceeds all required regulatory capital ratios and is considered well
capitalized.
Shareholders' equity was $5.8 million at year-end 1999 which was a decrease of
$447,000 from 1998. This decrease was due to a decline in the market value of
investment securities. Equity was $6.2 million at December 31, 1998, a 100%
increase from the 1997 year-end total of $3.1 million. The increase in 1998 was
a result of the sale of 380,000 shares of common stock at $9 per share. Average
shareholders' equity as a percentage of average total assets was 11.5% in 1999
and 12.4% in 1998.
At December 31, 1999 the Bank had a ratio of Tier I capital to risk-weighted
assets of 13.1% and a ratio of total regulatory capital to risk-weighted assets
of 14.1%, well above the regulatory minimum of 4.0% and 8.0%, respectively.
The Bank's analysis of capital for the quarters December 31, 1999 and 1998 is
presented in the following table.
Risk-Based Capital, (thousands)
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Tier I capital $ 3,961 $ 3,181
Qualifying allowance for loan losses/1/ 314 365
------- -------
Total regulatory capital $ 4,275 $ 3,546
======= =======
Total risk-weighted assets $30,336 $31,404
======= =======
Tier I as a percent of risk-weighted assets 13.06% 10.13%
Total Tier II capital as a percent of risk-weighted assets 14.09% 11.29%
Leverage ratio/2/ 7.89% 6.14%
</TABLE>
_____________________
/1/ Limited to 1.25% of risk-weighted assets.
/2/ Period end Tier I capital to adjusted average assets per quarter.
35
<PAGE>
===============================================================================
Management's Discussion and Analysis
- -------------------------------------------------------------------------------
Common Stock Outstanding
At December 31, 1997 the Company had 546,399 shares of common stock outstanding.
During 1997 the Company filed for, and received approval from the SEC for a
secondary stock offering of common stock at a price of $9 per share. The stock
sale began on December 10, 1997 and closed February 10, 1998 after the sale of
380,000 shares for net proceeds of approximately $3.1 million. Management used
the proceeds for general purposes and to finance growth. There were 926,399
common shares outstanding at December 31, 1999 and 1998. These shares are held
by approximately 1,000 shareholders of record.
Nonperforming and Problem Assets
Certain credit risks are inherent in making loans, particularly commercial and
consumer loans. Management prudently assesses these risks and attempts to
manage them effectively. The Bank also attempts to reduce repayment risks by
adhering to internal credit policies and procedures. These policies and
procedures include officer and customer limits, periodic loan documentation
review and follow up on exceptions to credit policies.
The allowance for loan losses is maintained at a level adequate to absorb
probable losses. Some of the factors which management considers in determining
the appropriate level of the allowance for credit losses are: past loss
experience, an evaluation of the current loan portfolio, identified loan
problems, the loan volume outstanding, the present and expected economic
conditions in general, regulatory policies, and in particular, how such
conditions relate to the market areas that the Bank serves. Bank regulators
also periodically review the Bank's loans and other assets to assess their
quality. Loans deemed uncollectible are charged to the allowance. Provisions
for loan losses and recoveries on loans previously charged off are added to the
allowance.
The accrual of interest on loans is discontinued on a loan when, in the opinion
of management, there is an indication that the borrower may be unable to meet
payments as they become due. Upon such discontinuance, all unpaid accrued
interest is reversed.
The provision for loan losses, net charge-offs and the activity in the allowance
for loan losses is detailed in the following table.
Allowance for Loan Losses (thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Allowance for loan losses, beginning $ 373 $ 270 $ 155
Provision for loan losses, added 173 166 186
------- ------- -------
546 436 341
Loans charged off (224) (64) (83)
Recoveries of loans previously charged off - 1 12
------- ------- -------
Net charge-offs (224) (63) (71)
------- ------- -------
Allowance for loan losses, ending $ 322 $ 373 $ 270
======= ======= =======
</TABLE>
The loan portfolio also included loans to various borrowers (watch loans) at
period-end for which management had concerns about the ability of the borrowers
to continue to comply with present loan repayment terms, and which could result
in some or all of these loans being uncollectible. Management monitors these
loans carefully and has provided for these loans in the allowance for loan
losses.
Management realizes that general economic trends greatly affect loan losses and
no assurances can be made about future losses. Management does, however,
consider the allowance for loan losses to be adequate at December 31, 1999 and
1998. The allocation of the reserve for loan losses is shown in the following
table.
Allocation of the Allowance for Loan Losses (thousands)
36
<PAGE>
===============================================================================
Management's Discussion and Analysis
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
1999 1998 1997
------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to: Amount Percent/1/ Amount Percent/1/ Amount Percent/1/
- -------------------------------------- ------ ---------- ------ ---------- ------ ----------
Commercial, financial and agricultural $ 168 $ 39.50% $ 222 43.28% $ 80 37.43
Real estate, construction - 1.77 - 2.32 - 2.79
Real estate, mortgage 71 44.66 63 38.03 103 36.87
Installment loans to individuals, other 83 14.07 88 16.37 87 22.91
------ ---------- ------ ---------- ------ ----------
Total $ 322 $ 100.00% $ 373 100.00% $ 270 100.00%
====== ========== ====== ========== ====== ==========
</TABLE>
________________
1 Percent of loans in each category to total loans.
Nonperforming Assets at December 31, 1999 and 1998 are analyzed in the table
below.
Nonperforming Assets (thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Nonaccrual loans $ 127 $ 330 $ -
Restructured loans - - -
Foreclosed and in-substance foreclosed properties 24 1 36
------- ------- -------
$ 151 $ 331 $ 36
======= ======= =======
</TABLE>
Nonperforming assets were .5% and 1.1% of gross loans outstanding at year-end
1999 and 1998, respectively. In addition to the nonperforming assets, loans
which were past due 90 days or more amounted to $86,000 at December 31, 1998.
There were no loans past due 90 days or more at December 31, 1999 or 1997. Net
loan charge-offs as a percentage of average loans were .7%, .2%, and .4% in
1999, 1998 and 1997, respectively. The allowance for loan losses was $322,000,
$373,000 and $270,000 at December 31, 1999, 1998 and 1997, respectively, or 1.0%
of gross loans at December 31, 1999 and 1.2% for December 31, 1998 and 1997.
Liquidity and Sensitivity
The principal goals of the Bank's asset and liability management strategy are
the maintenance of adequate liquidity and the management of interest rate risk.
Liquidity is the ability to convert assets to cash in order to fund depositors'
withdrawals or borrowers' loans without significant loss. Interest rate risk
management balances the effects of interest rate changes on assets that earn
interest against liabilities on which interest is paid, to protect the Bank
from wide fluctuations in its net interest income which could result from
interest rate changes.
Management must insure that adequate funds are available at all times to meet
the needs of its customers. On the asset side of the balance sheet, maturing
investments, loan payments, maturing loans, federal funds sold, and unpledged
investment securities are principal sources of liquidity. On the liability side
of the balance sheet, liquidity sources include core deposits, the ability to
increase large denomination certificates, Federal funds lines from correspondent
banks, borrowings from the Federal Reserve Bank, as well as the ability to
generate funds through the issuance of long-term debt and equity.
37
<PAGE>
================================================================================
Managements's Discussion and Analysis
- --------------------------------------------------------------------------------
Interest rate risk is the effect that changes in interest rates would have on
interest income and interest expense as interest-sensitive assets and interest-
sensitive liabilities either reprice or mature. Management attempts to maintain
the portfolios of earning assets and interest-bearing liabilities with
maturities or repricing opportunities at levels that will afford protection from
erosion of net interest margin, to the extent practical, from changes in
interest rates.
The table below shows the sensitivity of the Bank's balance sheet at the dates
indicated, but is not necessarily indicative of the position on other dates.
<TABLE>
<CAPTION>
Interest Rate Sensitivity
December 31, 1999
Maturities/Repricing
------------------------------------------------
1-3 4-12 13-60 Over 60
Months Months Months Months Total
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Earning assets:
Loans $ 4,384 $ 3,111 $23,711 $ 786 $31,992
Investments 4,722 549 1,003 8,401 14,675
Federal Funds Sold 760 - - - 760
-------- -------- ------- ------ -------
Total 9,866 3,660 24,714 9,187 47,427
-------- -------- ------- ------ -------
Interest-bearing liabilities:
Now accounts 13,131 - - - 19,533
Money market 6,805 - - - 6,805
Certificates of deposit 4,973 7,807 6,753 - 19,533
Other borrowed funds 2 4 30 91 127
-------- -------- ------- ------ -------
Total 24,911 7,811 6,783 91 39,596
-------- -------- ------- ------ -------
Interest rate gap $(15,045) $ (4,151) $17,931 $9,096 $ 7,831
======== ======== ======= ====== =======
Cumulative interest sensitivity gap $(15,045) $(19,196) $(1,265) $7,831
Ratio of sensitivity gap to total
earnings assets (31.72)% (8.75)% 37.81% 19.18% 16.51%
Cumulative ratio of sensitivity gap
to total earnings assets (31.72)% (40.47)% (2.66)% 16.51%
</TABLE>
At December 31, 1999, the Company was cumulatively asset-sensitive (earning
assets subject to interest rate changes exceeded interest-bearing liabilities
subject to changes in interest rates). NOW, savings and money market account
repricing within three months were $19.9 million, which historically have not
been as interest-sensitive as other types of interest-bearing deposits. Removing
the impact of NOW and money market accounts, the Bank is asset sensitive in the
three month or less time period, with the four to twelve months time period
being liability-sensitive, the thirteen to sixty months time period being asset-
sensitive and the over sixty months time period being asset-sensitive.
Certificates of deposit in denominations of $100,000 or more and large municipal
deposits are especially susceptible to interest rate changes. These deposits are
matched with short-term investments. Matching sensitive positions alone does not
ensure that the Bank has no interest rate risk. The repricing characteristics of
assets are different from the repricing characteristics of funding sources.
Thus, net interest income can be impacted by changes in interest rates even if
the repricing opportunities of assets and liabilities are perfectly matched.
38
<PAGE>
================================================================================
Managements's Discussion and Analysis
- --------------------------------------------------------------------------------
Effects of Inflation
Interest rates are affected by inflation, but the timing and magnitude of the
changes may not coincide with changes in the consumer price index. Management
actively monitors the Bank's interest rate sensitivity in order to minimize the
effects of inflationary trends on the Bank's operations. Other areas of non-
interest expenses may be more directly affected by inflation.
Selected Financial Data
The following table summarizes selected financial data considered to be
significant indicators of the Bank's operating results and financial condition
for the periods indicated.
<TABLE>
<CAPTION>
Selected Financial Data
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Summary of Operations
Interest income $ 3,648 $ 3,341 $ 2,454
Interest expense 1,831 1,813 1,371
------ ------- -------
Net interest income 1,817 1,528 1,083
Provision for credit losses 173 166 186
Other income 265 275 153
Other expense 1,880 1,613 1,297
Income taxes - - -
------- ------- -------
Net income $ 29 $ 24 $ (247)
======= ======= =======
Per Share Data
Basic earnings per share $ .03 $ .03 $ (.45)
Diluted earnings per share .03 .03 (.45)
Book value 6.25 6.74 5.69
Average Balance Sheet Summary
Loans, net $31,950 $25,454 $17,652
Securities 13,515 13,563 12,242
Total assets 52,212 47,904 34,677
Deposits 45,547 41,712 31,057
Shareholders' equity 6,016 5,951 3,190
Selected Ratios
Average equity to average assets 11.52% 12.42% 9.20%
Return on average assets .06% .06% (.71)%
Return on average equity .48% .40% (7.75)%
</TABLE>
39
<PAGE>
================================================================================
Board of Directors and Officers
- --------------------------------------------------------------------------------
Board of Directors
------------------
<TABLE>
<S> <C>
Sybil S. Atkinson.................................... Mediaid of America, Inc.
Jack W. Bowling...................................... H.T. Bowling, Incorporated
Jackson M. Bruce..................................... Gilmer, Sadler, Ingram, Sutherland & Hutton
Randolph V. Chrisley................................. Pulaski Furniture Corporation
Hiawatha Nicely, Jr.................................. New Century Consultants, Inc.
A. Carole Pratt...................................... Pratt & Mansell, DDS
David W. Ratcliff, Jr................................ Alliant TechSystems, Inc.
Nathaniel R. Tuck.................................... Tuck Clinic of Chiropractic, P.C.
J. David Wine........................................ Advanced Health Services, Inc.
Officers
--------
Phillip M. Baker..................................... Acting President & CEO
Deborah Boyd......................................... Loan Officer
Layne E. Burcham..................................... Loan Officer
Michael D. Ware...................................... Loan/Compliance Officer
Jackie Reichner...................................... Chief Operating Officer
</TABLE>
================================================================================
Stockholder Information
40
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
Annual Meeting
- --------------
The annual meeting of stockholders will be held at 10:00 a.m. on April 13, 2000
in the Training Room at Community National Bank, 900 Memorial Drive, Pulaski,
Virginia.
----------------------
Requests for Information
- ------------------------
Requests for information should be directed to Phillip Baker, Acting President &
CEO, at Community National Bank, Post Office Box 1060, Pulaski, Virginia, 24301;
Telephone (540) 994-0831. A copy of the Company's Form 10-KSB for 1999 will be
furnished, without charge, after March 31, 2000 upon written request and is
available on the internet at http://www.sec.gov.
----------------------
Common Stock Market Information Stock Transfer Agent
- ------------------------------- --------------------
Davenport & Company, LLC First Citizens Bank & Trust
101 South Jefferson Street Post Office Box 29522
Roanoke, Virginia 24011 Raleigh, North Carolina 27626
----------------------
Independent Auditors Legal Counsel
- -------------------- -------------
Larrowe & Company, PLC Mays & Valentine
Certified Public Accountants and Consultants NationsBank Center
Post Office Box 2108 Post Office Box 1122
Galax, Virginia 24333 Richmond, Virginia
23208-1122
-----------------------
<TABLE>
<CAPTION>
Main Office Downtown Office ATM
- ----------- --------------- ---
<S> <C> <C>
900 Memorial Drive 202 N. Washington Ave. New River Community College
Pulaski, Virginia Pulaski, Virginia Martin Hall
Dublin, Virginia
</TABLE>
Pulaski Community Hospital
Pulaski, Virginia
41
<PAGE>
CNB HOLDINGS, INC.
P.O. Box 1060
900 Memorial Drive
Pulaski, Virginia 24301
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders (the "Annual
Meeting") of CNB Holdings, Inc., (the "Company") will be held on Thursday, April
13, 2000, at 10:00 a.m., local time in the Training Room at Community National
Bank, 900 Memorial Drive, Pulaski, Virginia, for the purpose of considering and
voting upon:
1. The election of three directors of the Company to serve until the 2003
Annual Meeting of Shareholders.
2. Such other matters as may properly come before the Annual Meeting or
any adjournment thereof.
Only shareholders of record at the close of business on Monday, February
28, 2000, are entitled to notice of and to vote at the meeting or any
adjournment thereof.
A Proxy Statement and a proxy solicited by the Board of Directors are
enclosed herewith. To ensure a quorum for the meeting, please sign, date and
return the proxy promptly in the enclosed envelope. If you attend the meeting,
you may revoke your proxy and vote in person. The Company's 1999 Annual Report
to Shareholders is enclosed for your information.
By Order of the Board of Directors
A. Carole Pratt
Secretary
March 10, 2000
Please complete and return the enclosed proxy promptly. If you attend the
meeting in person, you may withdraw your proxy and vote your own shares.
<PAGE>
CNB HOLDINGS, INC.
P.O. Box 1060
900 Memorial Drive
Pulaski, Virginia 24301
___________________________
PROXY STATEMENT
___________________________
2000 ANNUAL MEETING OF SHAREHOLDERS
To Be Held April 13, 2000
This Proxy Statement is furnished to the shareholders of CNB Holdings, Inc.
(the "Company") in connection with the solicitation of proxies by the Board of
Directors of the Company to be voted at the 2000 Annual Meeting of Shareholders
of the Company (the "Annual Meeting") and any adjournment thereof. The Annual
Meeting will be held on Thursday, April 13, 2000 at 10:00 a.m., local time at
Community National Bank, 900 Memorial Drive, Pulaski, Virginia. This Proxy
Statement and the accompanying proxy are being mailed to shareholders on or
about March 10, 2000.
VOTING
General
The securities that can be voted at the Annual Meeting consist of the
common stock of the Company (the "Common Stock"), with each share entitling its
owner to one vote on each matter submitted to the shareholders. The record of
shareholders entitled to vote at the Annual Meeting was taken as of the close of
business on Monday February 28, 2000. On that date the company had outstanding
and entitled to vote 926,399 shares of Common Stock, with each share entitled to
one vote.
Proxies
All properly executed proxy cards delivered pursuant to this solicitation
and not revoked will be voted at the Annual Meeting in accordance with the
directions given. Shareholders should specify their choices with regard to the
election of directors on the accompanying proxy card. If no specific
instructions are given with regard to the matters to be voted upon, then the
shares represented by a signed proxy card will be voted "FOR" the election of
all director nominees. If any other matters properly come before the Annual
Meeting, the persons named as proxies will vote upon such matters according to
their judgment.
All proxy cards delivered pursuant to this solicitation are revocable at
any time at the option of the persons executing them by giving written notice to
the Secretary of the Company at P.O. Box 1060, 900 Memorial Drive, Pulaski,
Virginia 24301, or by executing and delivering to the Secretary a later dated
proxy, or by voting in person at the Annual Meeting.
All expenses incurred in connection with the solicitation of proxies will
be borne by the Company. Such costs include charges by brokers, fiduciaries and
custodians for forwarding proxy materials to beneficial owners of stock held in
their names. Solicitation may be undertaken by mail, telephone and personal
contact by directors, officers and employees of the Company without additional
compensation.
<PAGE>
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of the Common Stock
by the directors, executive officers and holders of 5% or more of the
outstanding shares of the Common Stock and all directors and executive officers
of the Company as a group as of February 28, 2000.
<TABLE>
<CAPTION>
Principal Occupation Shares Percentage of
Name, Age & Address Director During the Beneficially Shares
of Beneficial Owner Since Past Five Years Owned Outstanding(1)
- ----------------------------- ------------ ----------------------------- ----------------- ----------------------
DIRECTORS TO SERVE UNTIL 2002
<S> <C> <C> <C> <C>
Hiawatha Nicely, Jr., 50 1993 Chairman, President and CEO 57,001 4.9%
Dublin, Virginia of the Company, COO of the
Bank 1997-1999, Chairman of
the Bank 1993-1997
A. Carole Pratt, D.D.S., 48 1993 Secretary of the Company; 29,901(2) 2.6%
Pulaski, Virginia General Dentistry
David W. Ratcliff, Jr., 55 1993 Business Manager, Defense 27,706(3) 2.4%
Pulaski, Virginia Reconversion and Development
- Alliant Techsystems, Inc.
DIRECTORS TO SERVE UNTIL 2001
Sybil S. Atkinson, 53 1993 Mediaid of America, Inc.; 30,204(4) 2.7%
Pulaski, Virginia Parish Administrator of
Christ Episcopal Church
Randolph V. Chrisley, 52 1993 Vice President of Sales, 54,596 4.7%
Draper, Virginia Pulaski Furniture
Corporation
J. David Wine, 51 1993 Founder of Advance 55,970(5) 4.8%
Pulaski, Virginia Health-Care Services, Inc.;
and Advanced Health
Services, Inc.; cofounder of
Bay State Medical, Inc., and
Home Care Solutions, Inc.
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupation Shares Percentage of
Name, Age & Address Director During the Beneficially Shares
of Beneficial Owner Since Past Five Years Owned Outstanding(1)
- ----------------------------- ------------ ----------------------------- ----------------- ----------------------
<S> <C> <C> <C> <C>
NOMINEES FOR ELECTION AS
DIRECTORS TO SERVE UNTIL 2003
Jack W. Bowling, 53 1993 President, H. T. Bowling, 60,721(6) 5.2%
Dublin, Virginia Inc.
Jackson M. Bruce, 57 1993 Partner, law firm of Gilmer, 54,876 4.7%
Dublin, Virginia Sadler, Ingram,
Sutherland & Hutton
Chairman of the Bank 1999 -
present
Nathaniel R. Tuck, D.C., 47 1993 President and Owner, 33,638 2.9%
Pulaski, Virginia Tuck Clinic of
Chiropractic, P.C.
All Directors and 404,613 34.9%
Executive Officers
as a Group (9 Persons)
</TABLE>
- -
(1) For purposed of this table, beneficial ownership has been determined in
accordance with the provision of Rule 13d-3 of the Securities Exchange Act
of 1934 under which, in general, a person is deemed to be the beneficial
owner of a security if he has or shares the power to vote or direct the
voting of the security or the power to dispose of or direct the disposition
of the security, or if he has the right to acquire beneficial ownership of
the security within sixty days. Percentage is determined on the basis of
926,399 shares of Common Stock issued and outstanding, plus in each case
shares subject to currently exercisable options. The option ownership of the
directors reflected in this column is as follows: Mr. Nicely - 27,376; Dr.
Pratt - 14,876; Mr. Ratcliff - 14,876; Ms. Atkinson - 14,876; Mr. Chrisley -
27,096; Mr. Wine - 27,220; Mr. Bowling - 27,344; Mr. Bruce - 27,376; and Dr.
Tuck - 14,876.
(2) Includes 380 shares held by Ms. Pratt's minor children.
(3) Includes 374 shares held jointly with Mr. Ratcliff's children.
(4) Includes 1,263 shares owned by Ms. Atkinson's minor children.
(5) Includes 3,143 shares owned by an individual retirement account for the
benefit of Mr. Wine's wife.
(6) Includes 32,625 shares held by an investment company affiliate of Mr.
Bowling.
ELECTION OF DIRECTORS
Nominees
By resolution of the Board of Directors, the Board shall consist of nine
directors. The terms of the directors are staggered so that each year
approximately one-third of the Board of Directors is elected and each director
serves until the third Annual Meeting following his or her election and
thereafter until a successor has been elected and has qualified. This year, the
terms of three directors are expiring and thus three directors will be elected.
-3-
<PAGE>
Certain information concerning the nominees for election of directors at
this Annual Meeting who will serve until the 2003 Annual Meeting of Shareholders
is set forth above, as is certain information about the other classes of
directors whose terms will expire at the 2001 and 2002 Annual Meetings of
Shareholders. All of the nominees are currently directors of the Company and
Community National Bank, the Company's subsidiary bank (the "Bank").
In the event that any nominee withdraws or for any reason is not able to
serve as a director, the proxy will be voted for such other person as may be
designated by the Board of Directors as substitute nominee, but in no event will
the proxy be voted for more than three nominees. The Board of Directors has no
reason to believe that any nominee will not serve if elected.
Director Compensation
Neither the Company nor the Bank paid directors' fees during the last
fiscal year. Directors of the Company participate in the Company's stock option
plan. See "Stock Option Plan."
Company Board and Committee Meetings and Attendance
The Board of Directors of the Company held five meetings during the fiscal
year. All directors attended at least 75% of all meetings of the Board. The
Company's only standing committee is the Stock Option Committee. See "Stock
Option Plan".
Certain Relationships and Related Transactions
The Company has purchased two insurance policies (a general business policy
and a worker's compensation policy) through James L. Webb, Jr., a former
director of the Company and the Bank (Mr. Webb resigned from the Board in May
1999). The premiums for these policies totaled approximately $25,000 in 1999.
The Company and the Bank have had and expect to have banking and other
transactions in the ordinary course of business with directors and officers of
the Company and the Bank and their affiliates, including members of their
families or corporations, partnerships or other organizations in which such
directors or officers have a controlling interest, on substantially the same
terms (including price, interest rates and collateral) as those prevailing at
the time for comparable transactions with unrelated parties. Such transactions
are not expected to involve more than the normal risk of collectibility nor
present other unfavorable features to the Company and the Bank. The Bank is
subject to a limit on the aggregate amount it may lend to its and the Company's
directors and officers as a group equal to its unimpaired capital and surplus
(or, under a regulatory exemption available to banks with less than $100 million
in deposits, twice that amount). Loans to individual directors and officers must
also comply with the Bank's lending policies and statutory lending limits, and
directors with a personal interest in any loan application are excluded from the
consideration of such loan application.
The executive officers of the Company are elected by the Board of Directors
and serve at the pleasure of the Board. There are no family relationships among
any of the directors or executive officers.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO
ELECT THE THREE NOMINEES LISTED ABOVE AS DIRECTORS OF THE COMPANY.
-4-
<PAGE>
Executive Compensation
The following table shows the cash compensation paid by the Company to the
Company's Chief Executive Officer for the last three fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Other Annual
Name and Principal Position Year Salary(1) Compensation(2)
- --------------------------------------------------------- ---- --------- ---------------
<S> <C> <C> <C>
Hiawatha Nicely, Jr. 1999 $12,187 ---
Chairman, President and Chief Executive Officer 1998 $53,950 $ 62
1997 $22,232
Wayne L. Carpenter 1999 $62,893 ---
Chief Financial Officer 1998 $61,700 $2,790
Bank Chairman, President and Chief Executive Officer 1997 $62,096 $2,878
Phillip M. Baker 1999 $18,333 $2,000
Chief Financial Officer
</TABLE>
Acting President and Chief Executive Officer of Bank
- ----------------------
(1) Mr. Carpenter served as President and Chief Executive Officer of the Company
until August 1997. In August 1997, Hiawatha Nicely, Jr. was appointed as
President and Chief Executive Officer of the Company. Mr. Nicely served as
Chief Operations Officer of the Bank from 1997 until February 1999. Mr.
Carpenter served as President and Chief Executive Officer of the Bank through
August 1999. In September 1999 Phillip M. Baker was named as Acting President
and Chief Executive Officer. In November 1999 Mr. Baker was appointed Chief
Financial Officer and Chief Accounting Officer of the Company.
(2) Includes payments by the Company of health insurance premiums and 401(k)
contributions for Mr. Carpenter and Mr. Nicely.
The following table lists the stock options granted during fiscal year 1999
to Hiawatha Nicely, Jr., elected President and Chief Executive Officer of the
Company in August 1997, and Wayne L. Carpenter, the President and Chief
Executive Officer of the Company from 1993 through August 1997 and President and
Chief Executive Officer of the Bank through August 1999. The options listed
below were granted under the CNB Holdings, Inc. 1995 Stock Option Plan, pursuant
to which directors, executive officers and certain other key employees of the
Company and the Bank can receive options to purchase shares of the Company's
Common Stock. See "Stock Option Plan."
Option Grants in Fiscal Year 1999
<TABLE>
<CAPTION>
Percent of Total
Options
Granted to
Options Employees Exercise or Expiration
Name Granted in Fiscal Year(1) Base Price Date
- ---------------------- ------- ------------------- ----------- ----------
<S> <C> <C> <C> <C>
Hiawatha Nicely, Jr. 594 9.5% $9.13 April 2009
Wayne L. Carpenter 594 9.5% $9.13 April 2009
</TABLE>
- -----------------------
(1) Options for a total of 5,660 shares of Company Common Stock were granted
under the Stock Option Plan. Each director of the Company received shares
under the plan.
-5-
<PAGE>
Employment Agreements
Mr. Carpenter was a party to an Employment Agreement with the Bank pursuant
to which he was employed as President and Chief Executive Officer of the Bank.
The Employment Agreement provided for the initial term to expire five years
after the Bank opened for business (August 28, 1999). Mr. Carpenter's
Employment Agreement was not renewed upon expiration on August 28, 1999. The
Employment Agreement provided that following termination of his employment with
the Bank, Mr. Carpenter may not be employed in the banking business in Pulaski
County, any county that borders Pulaski County, or the cities of Radford or
Galax for a period of two years following termination.
No other employee of the Company or the Bank has an employment agreement.
Stock Option Plan
The Company's Stock Option Plan (the "Plan") was approved by shareholders
at the 1995 Annual Meeting. The provides for the issuance of stock options and
restricted stock covering an aggregate of 344,375 shares (adjusted for the May
30, 1997 five-for four stock split) to directors, officers and certain key
employees of the Company and the Bank and other participants designated under
the Plan (collectively, the "Participants"). The Plan provides for the issuance
of incentive stock options to officers and key employees of the Company and the
Bank and nonqualified stock options and restricted stock to all Plan
Participants. The Plan is administered by the Stock Option Committee of the
Board of Directors, which consists of Messrs. Bruce, Chrisley, Nicely and Wine
and Dr. Pratt.
Incentive Stock Options. The Plan provides for the issuance of incentive
stock options covering a maximum of 62,500 shares of the Common Stock (as
adjusted for the May 30, 1997 five-for four stock split), subject to future
adjustment for any stock splits, stock dividends, combinations or exchanges, or
other changes which affect the Common Stock. As discussed below, incentive
stock options afford certain tax benefits to the recipients. In general, to
qualify as an incentive stock option, the option must be granted only to
employees of the Company, be granted within ten years of the earlier of the date
the Plan is adopted by the Board or the date of approval of the Plan by the
Company's shareholders, not be exercisable more than ten years after the date of
grant, have an exercise price of not less than the fair market value of the
Common Stock at the time of grant, not be transferable other than by will or the
laws of descent and distribution, and be granted to a person who does not own
more than 10% of the total combined voting power of all classes of stock of the
Company or its subsidiaries at the time of grant. In addition, the Internal
Revenue Code limits the value of shares that can be exercised for the first time
by an employee in any one year under an incentive stock option plan to $100,000.
Nonqualified Stock Options. The Plan provides for automatic annual grants
of nonqualified stock options beginning in 1996 to the directors of the Company
on the day following the annual meeting of shareholders based on a formula that
reflects his or her performance during the year as judged by certain objective
criteria (the "Annual Director Grants"). The formula provides that the number of
shares of Common Stock covered by each Annual Director Grant is 625 shares,
subject to adjustment (i) downward by 31 shares if the director has missed more
-6-
<PAGE>
than one meeting of the Board of Directors since the last annual meeting, (ii)
downward by 31 shares if the director has failed to complete a director
education seminar since the last annual meeting, and (iii) upward or downward by
not more than 31 shares based on the percentage by which the Bank exceeds or
fails to exceed its performance goals. The exercise price is the estimated
market price on the grant date.
In 1995, the Company provided a one-time grant of options to the directors
based on performance criteria relating to their participation as directors in
the success of the Company and the Bank, including the number of shares
purchased in the initial offering, service in leadership positions on committees
of the Bank's Board of Directors, and other contributions. The aggregate amount
of shares covered by such options was 206,250, as adjusted for the May 30, 1997
five-for-four stock split, exercisable until 2005. The exercise price of those
options, as adjusted for the May 30, 1997 stock split, is $8.00 per share.
All of the nonqualified options issuable to directors described above
provide that the options are forfeited should the Company or the Bank be
required to increase its equity capital pursuant to a capital directive issued
by the Office of Comptroller of the Currency and the holder does not exercise
the options with certain time frames.
Restricted Stock. The Plan permits the issuance of shares of Common Stock
to Participants subject to vesting requirements based on continued service to
the Company or the Bank, the Company's or the Bank's performance, the individual
performance of the grantee, and other conditions deemed appropriate by the Stock
Option Committee. Shares of restricted stock are not transferable until vested.
Assuming the maximum option grants described above are made based on the
Company's current management structure, there will be no shares of restricted
stock available for issuance under the Plan. There are no present plans to
issue any shares of restricted stock.
Compliance with Section 16 of the Securities Exchange Act of 1934
Based on a review of the reports of changes in beneficial ownership of
Company Common Stock furnished to the Company, the Company believes that its
officers and directors filed on a timely basis the reports required to be filed
under Section 16 of the Securities Exchange Act of 1934 during the fiscal year
ended December 31, 1999.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Larrowe & Company, PLC, Galax, Virginia, acted as the Company's principal
independent certified public accountants for the fiscal years ended December 31,
1993 through 1999 and has been selected by the Board of Directors to act as the
Company's independent certified public accountants for the current fiscal year.
Representatives of Larrowe & Company, PLC are expected to be present at the
shareholders' meeting and will have the opportunity to make a statement if they
desire to do so and to respond to appropriate questions.
OTHER MATTERS WHICH MAY COME BEFORE THE MEETING
The Board of Directors knows of no matters other than those stated above
which are to be brought before the meeting. However, if any other matter should
be presented for consideration and voting, it is the intention of the persons
named in the enclosed form of Proxy to vote the Proxy in accordance with their
judgment of what is in the best interest of the Company.
-7-
<PAGE>
Information Relating to Shareholder Proposals
Proposals of shareholders intended to be presented at the 2001 Annual
Meeting of Shareholders of the Company must be received by the Company no later
than October 31, 2000 in order for such proposals to be included in the
Company's proxy statement and form of proxy relating to such meeting.
Availability of Form 10-KSB
On or about March 31, 2000, the Company will file with the Securities and
Exchange Commission an annual report (Form 10-KSB) for the year ended December
31, 1999. A copy of the Company's Form 10-KSB can be obtained without charge by
writing to the Corporate Secretary at P.O. Box 1060, 900 Memorial Drive,
Pulaski, Virginia 24301.
By order of the Board of Directors
A. CAROLE PRATT
Secretary
Pulaski, Virginia
March 10, 2000
-8-
<PAGE>
CNB HOLDINGS, INC.
P. O. Box 1060
900 Memorial Drive
Pulaski, Virginia 24301
This Proxy is solicited by the Board of Directors of CNB Holdings, Inc.
(the "Company") for the 2000 Annual Meeting of Shareholders to be held on
April 13, 2000 (the "Annual Meeting").
The undersigned hereby appoints David W. Ratcliff, Jr. and A. Carole
Pratt and each of them, with full power of substitution, as proxies to vote all
of the shares of Common Stock of the Company which the undersigned may be
entitled to vote at the Annual Meeting, and at any adjournments thereof, on the
following matters in the following manner:
1. Election of three directors of the Company to serve until the 2003 Annual
Meeting of Shareholders.
[ ] FOR all nominees listed below (except [ ] WITHHOLD AUTHORITY to vote
as marked to the for all nominees listed
contrary below) below
Jack W. Bowling, Jackson M. Bruce, and Nathaniel R. Tuck, D.C.
(Instruction: To withhold authority to vote for any individual nominee, write
that nominee's name below.)
- -------------------------------------------------------------------------------
2. In accordance with their judgment, upon such other matters as may properly
come before the Annual Meeting or any adjournment thereof.
When this Proxy is properly executed and returned, and not revoked, the
shares it represents will be noted at the meeting in accordance with the choices
specified above. If no choice is specified, it will be voted for the election of
the nominees listed above.
PLEASE DATE AND SIGN THIS PROXY EXACTLY AS YOUR NAME APPEARS BELOW.
Date: ___________________ , 2000 ____________________________________
(Signature of Shareholder)
____________________________________
(Signature of Shareholder)
NOTE: When signing as attorney, trustee, administrator, executor or guardian,
please give your full title as such. If a corporation, please sign in full
corporate name by President or other authorized officer. In the case of joint
tenants, each joint owner must sign.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CNB HOLDINGS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET AT DECEMBER 31,
1000 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER
31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,896,627
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 760,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 14,188,398
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 31,892,248
<ALLOWANCE> 321,574
<TOTAL-ASSETS> 51,778,331
<DEPOSITS> 45,769,733
<SHORT-TERM> 0
<LIABILITIES-OTHER> 89,049
<LONG-TERM> 126,570
0
0
<COMMON> 4,631,995
<OTHER-SE> 1,160,984
<TOTAL-LIABILITIES-AND-EQUITY> 51,778,331
<INTEREST-LOAN> 2,759,294
<INTEREST-INVEST> 831,176
<INTEREST-OTHER> 57,161
<INTEREST-TOTAL> 3,647,631
<INTEREST-DEPOSIT> 1,812,721
<INTEREST-EXPENSE> 1,831,143
<INTEREST-INCOME-NET> 1,816,488
<LOAN-LOSSES> 173,292
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,878,928
<INCOME-PRETAX> 29,438
<INCOME-PRE-EXTRAORDINARY> 29,438
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,438
<EPS-BASIC> .03
<EPS-DILUTED> .03
<YIELD-ACTUAL> 3.90
<LOANS-NON> 0
<LOANS-PAST> 126,534
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 126,534
<ALLOWANCE-OPEN> 372,574
<CHARGE-OFFS> 224,292
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 321,574
<ALLOWANCE-DOMESTIC> 321,574
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
